Why I hate Credit Card

I have always been wary of using credit cards for any transactions. Secuirty is one major aspect which actually pushes me to the limit of having a phobia of using credit card for any transaction. Here is a simple example of why I fear so much. When yesterday I wanted to change my billing address of one of my credit-card from a top Indian bank, this is the procedure I had to follow :

- Call up the customer care (I dont know who is sitting there. Is he a employee of credit card company or just a call-center employee)
- Answer all the queries from the other side which mostly involves personal information (Who stops the person at other side form mis-using that information)
- It is upto the discretion of the person at other end to go into how much details for getting to know the personal information (which he probably verifies, indicating that he already has access to all my personal information including the transactions I made). The idea behind this is to verify your identity. I still cannt believe that technology has not made such a progress as to eliminate this middle man. I should be able to change my address through some more secure way without any middle person.

Anyway the other reason I fear using a credit card is the way credit card companies try to extort money out of poor consumer with legal means. Most of the time it is usually a financial burden while using credit card than the comfort and convinience of using it. There is a phenomenal rise in the number of credit card users in India, because people find it easy to get money on credit (as high as few lakhs ruppees, no question asked) and the convinience of using it (no paper work, no queues to withdraw money, no hassels) and along with the claim of security the credit card companies proclaim (you dont have to carry cash, and if the card is lost just a single call to the customer care will prevent its misuse). But most of the people, espeically in India, and unaware of the fine print in the rules and conditions along with the smooth way credit card companies dupe the consumers.

It is probably one of the most profitable business for the banking institutions. I want to just clear some of the points which might take away some of the sheen of using a credit card and put some reality and insight into this whole business.

The money you get from credit card is similar to a loan just a bit more sophisticated. If you spend 50,000 Rs with your credit card today, essentially you took this money from the credit card company. So obviously you have to pay an interest on that loan. This loan (the money on credit you took) does not require you to submit any documents (as a normal loan would) or to prove your credibility. I remember that when I applied for a credit card, I did not reuired a lot of documents to submit. It was usually just fill up a form and submit the latest pay-slip. So a credit card company doesnt have much information about their customers and the risk of defaulting on loan is much higher. Someone can spend few lakhs using a credit card and actually vanish, and the credit card companies cannt do much. So obviously this loan is much riskier than any other loan. This compels the card comapnies to charge a much higher interest rate. This can be as high as 42% annually (thats what my credit card statement says).

Here is an interesting aspect about "
interest on outstanding balance". Almost every credit card company allows you to repay the loan (the balance) on a revolving credit basis. This is a extremely fine trick. So assume this month you spent 10,000 Rs through your card and when the statement comes, the company asks you just to pay back the "minimum amount due". This could be as minimum as 500 Rs. Assume that the company levied say 5% interest. So with a spending of 10,000 Rs, the outstanding balance is 10,000 + 5% of 10,000 (500Rs) + service tax (12% = 1200Rs). Let us assume no other charges (I will talk about other charges later on). So the total outstanding balance is 11700 Rs. Now you paid back Rs 500. So the next month, the outstanding balance is 11200 Rs. When the next month statement comes, you can see that the 5% interest is applied on 11200 Rs.

How can someone justify this 5% interest on the entire outstanding balance. The loan you took was for 10,000 Rs, out of which Rs 500 you paid back. So the 5% interest should be charged on 9500 Rs. But it is also charged on the previous interest and service charge you paid along with any other fees. What essentially is happenning is a compunding interest rate, which really can grow to an exhorbitant payback to the card company. The best way to kill this compounding is to NEVER use the revolving credit.

Let me tell you first of few terminologies:

Purchase Date --> Date on which you used the credit card for some purchase.
Billing Date --> Date on which your card company creates the bill.
Staement receive Date --> Usually the date when you receive the statement
Last Payment Date --> The date when you are supposed to pay the bill.






Grace Period = Last Payment Date - Purchase Date. This is essentially the point when you took loan (purchased something) and the date after which you will be charged interest and whole assortments of fees. This is an important period to use the card optimally. I will discuss this later.

Credit card companies also charge an assortment of lucrative fees.

Late Payment Fees: This is one fee I hate to pay. I have paid it many times and usually it is usually very high like Rs 500. A credit card company can even charge this fee if your payment is just a single day delay. Worse, the credit card company may determine that you have borrowed your entire outstanding balance from the time of purchase until the time of payment, eliminating the "grace period".

Annual Fees: This is a charge just to keep your card active. A simple straight gain for card companies.

Cash Withdrawal Fees: Some card companies has the facility to withdraw cash from ATMs using the credit card. There is usually some fee attached to it.

Balance Transfer Fees: Now a days I have seen some card companies urging customers to transfer the balance on any of their other credit cards to this company card with the benefit of low interest. They might apply some charge for this transfer.

Imagine the amount of money you have to shell every time you use the card. This is not the only charge. The credit card company will also charge the shopkeeper (something like 2%) for any transaction made. The shopkeeper pushes this 2% charge to the end consumer. Whenever I want to purchase anything from some shop, the shopkeeper will tell me that I have to pay the 2% extra if I plan to use the card. So at every point you as a consumer has to shell out money.

6 comments:

  1. I didn't read it till the end since it is in stark opposing contrast to what I've been given my head.

    I brush aisde all arguments as blaming doctor for your illness.

    Credit card is comfort and more convenience. If you are fickle minded, loan high interest credit or revolve balance, it is more to do with your financial indiscipline, fix it first.

    I'm wondering what personal information you share with the call center employee, DOB? or address or what else? and you are afraid, silly.

    I've been using credit cards and strictly pay up every month as any other utility bill, never take money, I love it hoarding in my pocket and go around arguing for it too, modern day alladin lamp.

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  2. And other thing, all plastic money transactions are accounted. NO shopkeeper can keep profit without coughing up tax on his profit.

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  3. what you say is true and even I have been using credit cards for the past 3-4 years without paying a single penny as late fee... taking your own analogy... you cannt blame the doctor for your illness... but once in a while when you are ill, does that give the doctor a right to exhort loads of money out of you..... I agree that credit card is comfort..... but convenience NO... its a convenience to use it.. but as you say needs a discipline... then isnt that pain.... so if you want to use card and not get bitten .. then you need to show discipline.... If i show discipline then there is no financial tool which can go against me.... no body is arguing about it.. I am anyway going to talk about how it can be utilised best...

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  4. Here are some of the reported cases of credit card fraud

    http://www.itwire.com.au/content/view/4781/945/

    http://inhome.rediff.com/money/2005/apr/08bpo.htm

    Since these are bigger transactions involving foreign comapnies, it gets tracked and reported.. what about smaller amounts (like say 50K rs).. nobody will notice it or take action against it...

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  5. Anonymous12:25 AM

    Agreed. There is an astonishingly high number of responsible and mature people who default on ccd payments for no good reason.

    The co's are not exactly saints. I could never understand how they could tax, tax.

    Shouldnt something so blatently unfair be outlawed?

    Anyhow, i agree it is a convenience. Sometimes, a statement even. The fact remains that a consumer should be diciplined whilst using it... But when was the last time that shopping and dicipline were used in the same sentence together??

    (ps. nice blog, new topics for an indian blog... -> bookmark)

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  6. We'd love to get your feed back. We recently started a poll on the Worst / Best Credit Card Issuers. Feel free to stop by and give us your opinions.

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