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Credit Cards January 1, 2006

Posted by Nilesh in Uncategorized.

First of all, a very happy and prosperous new year to anybody who reads this!!(given the number of people who read my blog, I am almost sure this is somebody I know.:-)).

I saw a documentary on how the credit card industry operates in the U.S and that has made me cautious, very cautious.

Let’s get straight to the important points most people are ignorant about:
(quoted from www.pbs.org)
1) Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically if you’re late on payments elsewhere — such as on another credit card or on a phone, car, or house payment — or simply because the bank feels you have taken on too much debt.

This applies in India too. My credit card agreement discloses that my credit history and any defaults I may make on that account may be recorded with a credit reference agency (and shared with other lenders). So, my good standing with this bank does not mean that I would be treated fairly. I could still find my interest rate increased, because I had,once long time back, defaulted a payment with some other bank(this actually happened with a guy in US) or the bank just thought I am riskier!!

2) My credit card agreement also states that the bank can alter any of the charges declared in the agreement without any prior notice.

What this means is that I may make a purchase agreeing to pay a specific value of interest. However, the bank reserves the right to increase the interest rate after the purchase and it is binding on me to pay accordingly. There is nothing I can do about it. As the documentary states, this is the only industry where the price can be hiked after the product has been sold!!

3) There is no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment.

Also, there is no regulatory upper limit on the interest rate that a credit card company can charge the cardholder and it is solely decided by the company.(However, I have no idea if this is true in India). Add to this the fact that they reserve the sole right to increase it without any notice and it becomes a deadly combination.My current minimum late payment fee is Rs.250/- and, as we know, the interest rate is 35.4% p.a!!

The documentary also notes that a senator tried to get the banks to put a sentence in the monthly statements, just below the minimum payment due – If you go on paying the minimum payment due, it will take you ‘xx’ months to clear the above debt.(Or something to that effect). This, the senator argued, would be fair to the consumers and was confirmed by the cardholders to be inspiring enough to make them pay back more every month. The bill was shot down!!

A company in the U.S, Providian, resorted to this- They would accept payments from the cardholders, clear the cheques, but not credit the amount to their accounts. This would then,invariably, result in a late fee. (When on late fees, let me note that they’ve increased from 5-10$ to 40$ after the removal of the cap on them).

Credit card companies have also been known to keep the due dates on Sundays hoping that the consumers will trip on them.

However, the U.S has about 145 million credit card users. In India the industry is still at a nascent stage but growing fast(is certainly true, what with daily calls for ‘lifetime’ free credit card offers!!). Which brings me to the next part of this post.

Having read Gaurav’s and other libertarians’ views on free markets, was wondering if this industry has a case for some positive government interventions and regulations. I am very new to this concept and am just building my views here. Also, I am not aware of the existing laws for this industry in India. But given that the industry is still comparatively new here, I assume there aren’t extensive laws to deal with all such unfair practices(by both, the companies and the cardholders).

The U.S seems to have an almost completely free market, in this industry. The limits on interest rates and fees were lifted too. This should’ve resulted in intense competition causing reduced interest rates and the consumer eventually being the winner. But, that has not happened. The fees, like I said, are almost 4-8 times now and the interest rates are high too. All the players have resorted to similar practices hiking the rates with gay abandon. Are regulations a necessity here? Or is the solution to let the market settle down with the consumers finally rejecting the credit card companies, forcing them to reduce rates? Is it how it is supposed to work with no regulations, with there being an unknown span of time where the companies run amok, earn huge amounts of money, cause immense distress to the consumers before they are reined in by the market? Or should the approach be to prevent the distress?

Anyways, apart from these questions that I ask, I know I will now be able to take more informed decisions on my credit card usage!!For the moment, I am content with it!!

Note: You can read some more on the topic here.