By Kumar Ashutosh
Plastic money or Credit Cards have evolved as a new and popular mode of payment in recent times. They are so popular that almost all the Public, Private and Foreign Banks, as well as Co-operative Banks, are venturing into the market and issuing their cards.
In general, the issuer of the card (usually a bank) creates a revolving account and extends credit to the cardholder. Visa and MasterCard credit cards are two of the most popular credit card brands in the global credit card market. They are not credit cards in themselves but payment systems.
Visa cards are accepted at 29 million merchant locations all over the world, and its cardholders have access to more than 1.2 million ATMs worldwide.
Both Visa and MasterCard don’t issue any credit cards and serve as “middleman” between consumers and merchants. The operate a third-party payment processing network and make money by charging fees to merchants in exchange for facilitating payment transactions.
Credit cards are issued to customers whose CIBIL report is clean. Most banks look at the applicant’s credit history to calculate the repayment capacity and decide whether to approve or reject the credit card application. Higher the credit score, higher the card approval rate and higher the credit limit.
Based on their annual income, they are assigned a credit limit, billing period and payment date. For instance, if the credit Card Billing period is 1st of the month you have to make the payment by the end of the previous month. It is an interest-free. You are not charged any interest and do not have to make any payment in this period.
At first glance, all this looks very attractive, but that is where the sweetness ends. For whatever reasons, the moment you default in making payment, all the problems start.
How do credit card companies make profit?
Bank and credit card companies have many ways of earning direct and indirect profits by offering 40-50 days credit.
Credit cards are a boon when it comes to convenience and financial security, but they can prove to be a bigger bane if used frivolously or casually by the customer. They can very well land you in a debt trap if they are not used carefully.
It is a well-known fact that Card issuing banks entice consumers to use the card more frequently as it generates income for them. One of the main complaints against the credit card companies is that they are issuing cards recklessly.
The problem starts when the customers fall into the trap of discount or reward offers. Cardholders are charged late payment fee and hefty interest if they do not make the payment by the due date for whatever reason. In some cases, the users have had to pay more than double the actual amount on account of a late fee and fine.
Some private and foreign banks employ muscle-men to get the money back. Some cases of suicide were reported due to harassment by middle-men.
RBI is aware of this problem and has asked banks not to use such tactics to recover dues.
Interestingly even former RBI governor Y V Reddy was cheated by a credit card company before taking the charge of the apex bank “The credit card companies need to be more transparent. We need to develop a methodology or a system to rate the services of these firms,” he was quoted as saying.
Considering the misuse of credit card, the Card Act of 2009 was passed in the USA to protect the interest of the Credit Card Holders in 2010. It is very comprehensive reform to establish fair and transparent practices. Some of its salient features were:
- Adequate time to consumers to pay their bills— at least 21 days after dispatch of bill
- A retroactive rate of interest not allowed– customers should be given at least 45 days notice if any change has to be made.
- Excessive marketing to young people. Users under the age of 21 must prove that they have an independent income before applying for a credit card.
In India too, a large number of credit card consumers have complained to different consumer forum against aggressive marketing, excess billing, miscommitment and false promises by credit card companies. The terms and conditions mentioned in the credit card application form are grossly unfair, unilateral and against the rights of the credit card holders.
The terms of the credit card application form are one-sided and unjust, and yet the consumer has to accept them on `take it or leave it’ basis without any negotiation or change.
The cause, of the problem, is that apart from RBI ‘Guidelines on Fair Practices Code for Lenders’, there is no specific law regulating the management of consumer credits in India.
In any case, it is advisable to pay your credit card dues on time as even an even small amount of overdue can make your CIBIL score low.