Credit cards & Gen Z: Spending should not exceed 20-30% of take-home income

Credit utilisation ratio should remain below 30%

In March 2026, GenZ consumers aged 30 or below made up half of all first-time credit card customers. Among those aged 24 to 30, 31 per cent already had at least two active credit products. Within three months of receiving their first card, 28 per cent had built balances of ₹25,000 or more, while 69 per cent took on another unsecured loan within a year, according to a TransUnion CIBIL white paper. Clearly, Gen Z is entering the credit-card market earlier, already saddled with debt. They also build balances faster and add fresh credit sooner.

 

Align spending with repayment capacity

 

The sanctioned credit limit only shows the maximum amount a lender is willing to extend. It does not reflect what a user can afford.

 

“Affordable card spending should be determined from monthly cash flow after accounting for essential expenses, existing equated monthly instalments (EMIs) and other investments, and emergency savings,” says Rohit Garg, co-founder and chief executive officer (CEO), Olyv.

 

Users should protect their savings goals before allocating money to discretionary expenditure. “Savings should ideally be at least 20 per cent of take-home income,” says Saurabh Bansal, founder, Finatwork Investment Advisor, a Sebi-registered investment adviser.

 

Card spending should fit within the disposable income left after these allocations. “As a thumb rule, credit card spending should be restricted to 20–30 per cent of take-home income, provided the entire balance is repaid every billing cycle,” says Garg.

 

Users should factor in every loan instalment while assessing affordability. “Total monthly debt obligations should preferably remain below 35–40 per cent of take-home income,” says Garg. Debt above this level reduces financial flexibility and makes it harder to absorb an unexpected expense or disruption in income.

 

Maintain prudent utilisation ratio

 

Users should keep overall credit utilisation, or the proportion of the sanctioned limit used each month, below 30 per cent. “Utilisation of 10–20 per cent is considered preferable for a strong credit profile,” says Arun Ramamurthy, author of the book, Unlock the Power of Your Credit Score.

 

Lenders consider both total utilisation across all cards and utilisation on each card. “Avoid maxing out a single card even when your overall utilisation is low,” says Ramamurthy.

 

Do not carry balances forward

 

Paying only the minimum amount due may prevent default, but interest continues to accrue on the unpaid balance. “Annualised credit card interest rates are 36–48 per cent or higher, depending on the issuer,” says Garg.

 

“Goods and services tax on interest and applicable late charges can cause the debt to snowball,” adds Bansal.

 

Users who carry a balance may also lose the interest-free period on fresh purchases.

 

A credit card should serve as a convenient payment tool rather than a borrowing facility. “Full repayment prevents short-term payment convenience from turning into long-term financial stress,” says Garg.

 

Watch out for signs of overleveraging

 

Repeatedly paying only the minimum amount due indicates overleveraging. “Carrying unpaid balances from one month to the next indicates growing dependence on credit,” says Ramamurthy.

 

Other warning signs include using one credit card to repay another, relying on cards for groceries or other essentials after cash runs out, and feeling anxious before payment due dates. “Frequently converting routine expenses into EMIs indicates repayment stress. Regularly crossing 30–40 per cent of the available limit may also indicate excessive credit use,” says Bansal.

 

A cardholder who sees these signs should stop new discretionary spending, pay more than the minimum due, follow a disciplined repayment plan and avoid taking fresh credit to service existing debt. “When several cards are involved, the highest-interest debt should be repaid first,” says Bansal.

 

Use EMI conversion sparingly

 

Converting a purchase into EMIs can provide short-term relief when an unexpectedly high expense cannot be repaid in the current month. “A smaller outstanding amount may be converted for a short tenure of two, three or six months when current liquidity is inadequate,” says Harsh Grover, co-founder, LoansJagat.

 

Issuers often offer EMI conversion without assessing the user’s income or overall financial position, which can be helpful to those in distress.

 

A user who converts a large purchase without checking repayment capacity could, however, create a heavy debt burden because conversion only defers repayment.

 

“Younger users with relatively low incomes may be affected more severely by the additional repayment burden. Future EMI payments may conflict with other essential expenses,” says Grover.

 

Conversion to EMI is justified for meeting an unexpectedly high medical or educational expense. Users should, however, avoid it when they can pay for a purchase without taking on costly card debt. “Ensure that future instalments remain affordable after accounting for other expenses,” says Grover.

 

Factor in all costs

 

Users must consider all the costs attached to EMI conversion. EMI interest may range from approximately 10.5 per cent to 25 per cent annually.

 

Reward points earned on the purchase are generally reversed after conversion. Processing fees may range from 1 per cent to 5 per cent of the transaction amount. “Calculate the combined cost of interest, processing fees and lost reward points,” says Grover.

 

A lower-interest personal loan may preserve rewards and involve a lower processing fee than credit card EMI conversion.

 

Strengthen credit through disciplined use

 

Young credit card users can build a sound credit history by paying their dues in full before the due date, keeping utilisation preferably below 30 per cent, and using the card regularly but responsibly. “Avoid applying for several cards or loans around the same time,” says Ramamurthy.

 

Check monthly statements for errors and fraudulent transactions. “Older credit accounts may be kept active because a longer credit history supports the credit profile,” says Bansal.

 

Swipe smart, stay debt-free

 

·       Avoid cash withdrawals, as charges apply immediately and there is no interest-free period

 

·       Do not spend merely to earn cashback or reward points

 

·       Avoid impulse purchases merely because credit is available

 

·       Treat the credit limit as a facility that provides financial flexibility, not as additional income

 

·       Understand the billing cycle and be aware of the payment due date