Credit cards are a sweet poison

At the mass level, the credit card as well as the loyalty card boom in India started in the early 2000’s. That is the time when telemarketers swamped just about everyone with offers for new credit card. A Chairman of a management consulting firm has four credit cards and another 20 plastic ones, including club membership airline and hotel membership and dining discount cards.

It was not always like this barely a decade ago, it was common in India to harbor fears about losing money through misuse of credit cards. There was also a mental block against owing money to someone. The psyche has altered.

But there’s method behind the madness. One Mr.L who works for a firm producing energy efficient products says having more credit cards raises the customer’s overall credit limit. A senior journalist OS (name changed) feels a sense of security in carrying more than one card. In case one of them does not work.

Co-branded cards have added to the complexity of the market. Such cards, where a bank ties up with another organization such as airline, gives an opportunity to the customer to earn bonus points that may accrue additional monetary benefit.

Bookstores offer discounts to loyalty cardholders. So do petrol pumps. And airlines compete with each other to woo customers through frequent flyer cards, mileage points can be exchanged for free flights. Executive director, Air India says offering frequent flyer membership has helped airlines in ‘customer retention’, acquisition of new customers and improving communication with them.

But do loyalty cards really ensure loyalty? For Mr. S, it does. He generally books domestic flights with Jet Airways because he holds their frequent flyer card and can avail of their facilities.

The loyalty card scheme has boosted sales as almost all customers of the airline are repeat customers. Loyalty cards also give middle class consumers a sense of status that they belong to a perceived exclusive club.

There is a flip side to the card rush as well. Multiple cards also lead to problems for customers like loosing track of different bills each month and falling behind on payments. Sometimes the temptation of high credit limit entices customers to overspend. Nearly 7%-9% of credit card industry turnover is becoming bad debt.

Banks are indiscriminately issuing cards without looking into the afford ability of the customers. They are also indiscriminately increasing the credit limit of customers. The credit card has become a poison sweet in the pocket and one is tempted to consume several times before realizing it is a poison.

Banks cite call costs for high credit card rates:

The July 7, 2007 order of the National Consumer Disputes Redressal Commission (NCDRC) excess of 30% per annum from credit card holders by banks for the former’s failure to make full payment on the due date or paying the minimum amount due, is unfair trade practice.

It had also said that penal interest could be levied only once for the period of default and should not be capitalized while also terming the practice of computing interest on monthly basis as ‘unfair trade practice.

Among the factors listed by the banks justifying the exorbitant rates was the cost of calls. In other words, calls made randomly by the bank’s authorized call centers incessantly to persuade people to take a credit card, is also taken into account for realization through charging of penal interest from a defaulting card holder

The other notable factors listed are processing cost for setting up a new card in the operating system, cost of courier and cost of embossing the card, cost of providing phone banking service, cost of sending monthly statements cost of providing internet banking facility, cost of waiving charges for service reasons, cost of marketing and promotional offers and cost of rewards and loyalty program.