Next time your bank informs you that the limit on your credit card has been slashed, or that your card will be cancelled because of repeated defaults, don?t be too surprised. As a part of a cleaning-up exercise, banks have become cautious about issuing new credit cards and are undertaking more rigorous credit checks on the existing card holders.
Data from the Reserve Bank of India’s Trends and Progress in Banking report show that the total number of outstanding credit cards issued by scheduled public, private and foreign banks in 2010-11 dropped to 18.04 million from 24.70 million during 2008-09, as card issuing banks became increasingly cautious to protect against potential delinquencies.
Private sector banks have been more cautions in issuing new credit cards and the outstanding credit card numbers have fallen from 12.18 million in 2008-09 to 9.32 million in 2010-11. Interestingly, data from the central bank also show that the outstanding debit cards have increased and the total number of transactions through debit cards has outpaced the number of credit card swipes.
Experts say with rising delinquencies, banks will be more cautious in the future and card holders will have to be careful while rolling the credit as the annualised interest rate can range between 37.8% and 42%, depending on your spend, payback and utilisation patterns and defaults.
?Though transfer of credit from one bank to another can be a short-term relief for the card user, it leads to perpetual default in the long run and leads to a vicious cycle,? says Vikas Talwar, a certified financial planner.
In the past, because of the economic buoyancy, banks issuing credit cards have been chasing all and sundry to increase their market share. Some issued multiple cards under different branding to the same set of people without any proper due diligence. Talwar says this led to a situation where everyone was swiping without even realising that they were being led into a debt trap.
So, while it is convenient to swipe your card for payments, the spender must be confident that he will be able to pay his outstanding dues on time, and in full. Card issuers usually give a credit window of 3-4 weeks from the day you make the spend till the time you get your statement. So, for that period, the credit card spend is like an interest-free loan, which can be useful to borrowers, provided they repay the amount before the due date. The monthly payment should at least cover the minimum amount due, which is usually calculated as 5% of one’s balance outstanding or the sum of all installments, interest or other bank charges, the amount utilised over the credit limit if any and 1% of remaining balance outstanding, which ever is higher. In fact, rolling the credit is much more expensive than taking a personal loan, which can be availed at 18%-24% per annum.
Moreover, some banks still charge an annual fee just to keep your card active, especially for those cards that offers users special privileges and loyalty. For example, for a Primary Card,
Citibank does not charge any fees if R30,000 or more is spent on the card during the year (a year from the date of issuance of the card). Otherwise, the bank charges a fee of R1,000 at the end of the year. Most card issuers levy charges like cash advance fees, late payment charges per month, ECS/cheque bounce charges and railway ticket booking or cancellation surcharge for counter bookings. They also charge for statement request for beyond three months, outstation cheques and foreign currency transactions.
The credit limit is decided by the card issuer at the time of giving the card and the available credit limit is printed at the time of generation of each monthly statement. The limit can be raised by the bank after some years if you have a clean payment history with the issuer, regular transactions and age eligibility. While most banks fix the limit at the time of issuing the card depending on your income, one can request the bank to increase it after some years, depending on the increase in annual income.
While credit cards can also be used like a debit cards to withdraw cash depending on your cash withdrawal limit, analysts say, it should be done only in case of an emergency as banks charge a cash advance fee ranging from 2 to 4% of the withdrawn amount and it is treated as a loan. Analysts say, to reduce defaults, banks will have to profile their customers more intensely and devise various customised pricing methods as is done in other developed countries. That will help genuine users to use credit cards more effectively without falling into a debt trap.