This is a welcome development that may liberate many of the middle class households who have been dragged into a "Debt trap" through aggressive marketing of Credit cards. In the older days, "Being Thrifty" was considered a virtue. The Credit cards have changed this perspective to the extent that the Current generation may look at a person opening a "Recurring Deposit account" with the same kind of amusement with which they see a non smoker or a teetotaler. The Debit cards may perhaps change this undesirable trend.

Discerning consumers are not only unhappy with the change of attitude brought in by the credit card agencies but also unhappy with their attempt to encourage the card users to avail credit on the credit card even for buying consumer durables. They are deliberately hiding the fact that borrowing on the credit card is very expensive and could land a person easily into a debt trap. Let us see how this "Debt trap" situation arises.

Many Credit card consumers believe that as long as they pay the expenses incurred on the card within the time specified in the card statement, they will not have to pay any interest. They also believe that if they carry over the Balance as a "Credit", a reasonable interest is levied until the credit is repaid. We are presently living in a period where inflation rates are around 2%, Deposit interest rates are around 10 to 11 % p.a. and industrial borrowing rates are around 14% to 17% pa and Hire purchase rates are around 22% to 26%pa. In such circumstances, Cardholders believe that they should be paying an interest of around 24 % pa for their borrowings on the credit card. But you may be surprised to note that except Amex, which is charging 1.99 % per month, most other card companies are charging around 2.75% to 2.9 % per month as interest. This works out to nearly 34 to 35 % pa.

Moreover, with the exception of Diners, all the others have devised a peculiar rule of charging interest on credit cards that make the cost of borrowing on the credit cards not 34 % pa but much more than 50% pa. This is a system, which says that if you borrow on transaction ‘X’, you will be charged interest not only on your transaction ‘X’ but also on your transaction ‘Y’. A simple example will demonstrate this.

Let us take an example of a card user who normally incurs an expenditure of Rs 10000 per month and pays it off in the following month. In the process he enjoys some period of free credit of around 22 days. At 24 % pa the benefit of this free credit works out to Rs 2400. This perhaps is what he is paying as the annual membership fee.

Let us assume that this person buys a Consumer Durable worth say Rs 20000 during one month using his card and wishes to pay it off in installments over a period. He therefore incurs an expense of Rs 30000 during one month and carries over Rs 20000 to be paid in 10 installments of Rs 2000 each with interest of around 2.90% per month which some card agencies are charging. This interest of 2.9% p m is itself equal to 35% pa and would amount to around Rs 2900 during the 10-month period.

You would however be surprised to find at the end of the 10-month period that you would have been charged an additional Rs 2820 as interest on your monthly expenses of Rs 10000 which you have been regularly paying off. The total cost of borrowing Rs 20000 on the credit card and repaying in 10 installments is therefore Rs 5820 which is equivalent of 70% pa!

And there lies the story of how a credit card user is being dragged into a "Debt trap". It is time therefore for Credit card users to switch to more consumer friendly Credit cards or the Debit Card and protect themselves from exploitation. Perhaps we also need a "Credit Card Users association" to protect further exploitationand device methods by which card users know what exactly they are buying.

Na.Vijayashankar

31 st July 1999