Who does not know the credit card today? It is an E-commerce era and paying online to stores cannot be done without the tools like credit cards.
Until a few years back, people used to have a credit card in their pocket for taking the pride and boasting in front of friends for owning the plastic money.
However, this was also the time when people misused the instrument so much that they could not maintain a balance between their spendings and income.
Resultantly, a significant percentage of people turned defaulters and couldn’t pay the money they owed to banks, and the ratio of bad debts in the banking industry went alarmingly high.
Today, banks have become more careful in issuing a credit card. They have become more vigilant and careful while choosing a person for selling their financial products.
Even today, people get trapped in a similar fashion and become helpless in the end when the debt ratio goes beyond their limits. The sales department of banks keep hunting people for achieving their targets, and the vicious circle goes on.
The question arises if people become helpless and don’t return bank’s money then why the bank keep entrusting them and offering them loans in the shape of a credit card? Why would a financial institution keep losing money deliberately?
There is a catch. I will try to put before you a couple of situations for making things a bit clearer for new customers.
For a bank, plastic money is categorized into ‘unsecured’ and ‘secured’ depending upon the type of collateral.
Unsecured credit cards are offered to the public without obtaining any security whereas the secured credit cards are usually offered to bigger corporate clients against their loan line.
Moreover, different financial institutions offer varying number of cards which are named as Visa, Master, Union, American Express, etc.
What is Credit Card?
A credit card is a product for any bank and just like any other organization, their sales teams have pressure to sell more products.
Therefore, it is always a pitch from their side. It happens this way that one beautiful morning, you get a call from a banking agent who must have gotten hold of your number from a cafe or a place where you had dropped your mobile number while purchasing something.
It is very likely that agent must have had the list from another bank where you maintain your salary account or your bank is calling you because you have somehow established a good history with them.
The agent, most of the times a female, grabs your attention when she joyously reveals that you are among few of the privileged customers of the bank who are entitled to enjoy a ‘free credit card.’ Yes, ‘free’ is what we keep looking for in Pakistan.
The marketers in this country exploit well the consumer psyche and sell almost anything by calling it a Free.
At this moment, the agent starts explaining the most promising loan facility without any charges. She only has to get a half-hearted nod from you, and the next thing would be a permission for an appointment for the product demo.
Once you permit, the very next day you find a guy in your office and with his ‘oily tongue’ he convinces you to be a part of the exclusive club where other members are enjoying the experience of their lives by getting so many discounts on various products through this magical credit card.
Scene 1 (Customer is overjoyed and accepts whatever agent offers)
He entices customer by proposing to spend as much as he can and pay later in full or partially through a very flexible payment plan.
He is skilled enough to read customer’s mind and notice the excitement on his face. This is the right moment when he brings out a fancy form, fill in few details and takes customer’s signature. He promises to take care of every other thing and disappears.
Scene 2 ( Customer is a hard nut to crack)
The agent notices that all his efforts are not bringing results because the customer is not showing interest in free offers and big discounts. He starts reading another script and requests him to accept the offer as this would give him a chance to earn much-needed commission for his little kids who are in school.
The guy would beg customer to let him earn the commission by accepting the offer and also tells him a way out to deactivate the card later if it is not required.
Be aware, both the above scenarios are marketing gimmicks for achieving their sales targets.
In most of the cases, the customer is likely to fall prey, one way or other. Whether it is a temptation or a kind heart gesture for helping the agent, the form gets signed.
In just a few weeks, the customer gets a thick envelope via courier with a plastic credit card inside along with some brochures highlighting some fantastic deals that he can enjoy by charging your card.
Soon after the card is delivered, he gets a call from the bank about an SMS service. The customer is told that he will get a text message whenever he or anyone else use the card.
It would be a security alert feature and beneficial for keeping funds safe. Such services are free for the first year only, but he opts it bearing in mind the security concern.
If the customer has not used the card, the first bill he receives will only be service charges which would be Rs. 50 in most of the cases. It has been observed to be a usual practice that customers ignore such a small bill with an idea of paying it next time.
The ignorant customer receives a bill of Rs. 650 next month, Rs. 50 services charges and a penalty of Rs. 600 for not paying the fees last month.
In a state of confusion, he calls up the help desk and asks about the unwanted bill but the person on the other side of the phone reveals that the bill amount would be doubled next month if it is was not paid.
The depressed customer goes to the bank, joins a long queue and only upon reaching the counter he comes to know that an extra Rs. 500 would be required for paying the bill in cash.
To avoid cash deposit penalty, across cheque is a solution, but the last deposit date would not allow him to avail the easy option so the customer would end up paying Rs. 1,150 against a meager bill of Rs. 50.
The furious customer decides to end the menace and call the helpline for canceling the card but the representative explains his inability because the client has to pay Rs. 50 service charges for the current month and the card can only be discontinued only if the balance is ‘0’.
The above customer had to generate the income for the bank without purchasing anything.
However, there is another kind of customer who would select a couple of electronic items from the brochures straight away, spends lavishly in the first month in hope for some easy installment plan.
Let’s say the customer earns a monthly salary of Rs.50K, and he agrees to a monthly payment plan of Rs. 10K. Things go right in the first few months unless his own monthly expense swells beyond Rs. 40K.
He has two options, either borrow money from someone or use the available credit limit on the card for buying grocery with a self-promise of paying back the additionally used limit in the next month.
Here start the bad days when more bills come in the next month putting your expenses at a peak.
For credit card bills he has another option, pays the minimum amount and forgets about the rest. This is the trap. He ends up paying the markups only, and it goes like this for a couple of months before he is declared a defaulter.
Soon as the stage approaches, the bank’s recovery department comes into action and spoils the whole experience with many lessons to learn.
In some cases, customer and bank talk and reach an agreement for the recovery of the principal amount and the markup. However, in many cases, the customer flees, and the bank put the unrecovered amount in the non-performing loan.
However, it is interesting to know that bank is very seldom on the receiving end and recovers the principal loan amount before such stage arrives, and the poor customer only has to vanish for the markup amount.
I would not say keeping a credit card is a bad idea. However, there is always a smart way to spend through your card. In my upcoming article, I will try to explain a few smart ways to use your credit card.