See through the gaps while you make a wild dash into the shops with credit card : WebArticleWorld.com

See through the gaps while you make a wild dash into the shops with credit card

30.10.2008 | Author: Simon Crerar | Posted in Finance

But the efficiency comes at a certain cost to the users. Usually the interest rate is relatively high. The usage cost of the plastic money further shoots up if the users revolve credit or make the minimum amount payments. Under such circumstances the interest mounts up as big as four times than the housing loans. So the credit card issuers use them as hidden vehicles for credit expansion. Against this background, some experts are arguing that the credit card rates must be capped to save the interests of the users.

These experts argue that initially the users are lured into going on a mindless shopping spree. This in turn lands them into a debt trap, because due to the high interest rates they can not repay the amount within the specified time period. Credit card issuers then encourage them to convert these liabilities into a full-fledged loan. Such steps are taken to decrease their non-performing assets. Such high rates of interest are primarily responsible for sky-high credit card debt, which stood at Rs 26500 crore in March 2008. It has risen by as much as 87 percent since May 2007. Against such gloomy scenario the rate of default may go up to 9.5 percent within the next two years from the present figure of 7.5 percent.

On the contrary, the RBI still holds the view that credit cards are just a ‘payment mechanism’ thus deciding against any cap on their rates of interests. The supporters of the cap however are trying to convince RBI that as per the Credit Information Companies (Regulation) Bill, 2005, the credit card users are termed as ‘borrowers’. Moreover several consumer credit regulations hold the similar interpretation. Countries like Thailand have put a ceiling of 18 percent on credit card interest rates charges. We certainly need to do regarding steps like raising the limits of minimum monthly salary requirements for issuing the card. The banks might consider the option of putting charges at par with unsecured advances.

But contrary to all these expectations and suggestions, credit card companies are charging bigger interest rates. They are even cutting the credit car limits of their customers. These moves have been further boosted by the prevailing credit card crunch worldwide. In fact, during the last couple of months, important credit card issuers like SBI and HDFC have added to the range of slabs regarding the interest rates. With their liquidity under stress most of the credit card companies are changing their interest rate bands, which gets translated into higher rates of interests. Biggest credit card issuer, SBI has hiked the upper end of the interest rate slab from 3.1 percent to 3.35 during the present month. HDFC on the other hand has taken the slab ceiling to 3.25 percent from the last month’s figure of just 2.95 percent.

However, beyond the issues of higher or lower rates, newer and newer market players are entering the field, which only shows that this type of plastic money transaction is going to prevail in the future. According to the latest reports, LIC might launch its credit card in October. It is looking for a suitable partner to launch its services this festive season as a sort of Diwali gift to its clients. In fact, the insurance powerhouse is planning to accept premiums through the use of credit cards. It has already arranged with Axis bank and Corporation bank regarding accepting premiums by their account holders.