Thursday, 19 February 2009

Why does anybody borrow on a credit card ?


I got a lovely comment from Aashish Sharma yesterday, complimenting my ranting. Got me very motivated to make another rant, instead of writing about the gloomy Indian budget.

Why does anybody borrow on a credit card ? This is a naive question as millions of people do borrow on a credit card. But why ? And what are the ethics of the credit card industry ?

Of course, credit cards are incredibly convenient. Without them life would be very difficult in today's world. I remember a time, not so long ago, when Indians could not get an international credit card - so when an Indian travelled abroad he had to pay cash. I remember whenever I had to check into a hotel overseas, a strange look that said "who is this strange barbarian who does not even have a credit card ?"

Sure, credit cards bring fabulous convenience. But why credit cards ? Why not just debit cards ?

In practice, I use credit cards as debit cards. Apparently a majority of credit card users do so that way. They pay off their credit card bills exactly on the due dates. But pure debit cards are inconvenient to use (for eg on line) and are not as widely accepted. Hence I use a credit card but have set up arrangements with my bank that the bill is automatically debited to my bank account on the due date. So what I really need is a universally accepted debit card, but since that is not popular, I have converted the credit card into a debit card for all practical purposes.

But therein lies the rub. I get free credit for 20 days or so. This carries no cost. I don't want this credit, but I have no choice. And the card issuers have to make money; they are hardly in this for charity. So what do they do ? They charge the idiots who don't repay on the due date and therefore borrow on their card, usurious interest rates. 20%+interest rates - even Shylock would take his hat off to that. They camouflage it in shamelessly misleading claims - Only 2% interest with a small asterisk which in a bottom footnote in font size of 2 is explained as 24% APR, as if any sane person can understand what an APR is.

The credit card industry is the only strange animal that hates people who pay back their dues and loves people who don't. This itself tells you about the ethics of this business.

Only an absolute fool would borrow on a credit card. But there are many people who deliberately, or inadvertently, are fools. They buy some nice goodie, on an impulse, using a credit card. When payment time comes, they don't have the money, for they have bought something they can't pay for. The lovely credit card company tells them, they need to pay only 10% - what wonderful chaps they are ! And so the spiral starts.

What sort of stuff would you buy on a credit card anyway that pulls you into debt ? If you buy a house, you can get a housing loan at sensible rates of interest. If you buy a car you can get financing sensibly. Ditto for most goods that you really need and aspire for. Its the vanity and the luxury for which you can't get sensible finance. Do you really want to pay 24% interest to own this rubbish. I cannot think of a single product (a house included) that can justify a 24% interest.

I hold credit card companies on roughly the same status as drug dealers. They aggressively market the stuff to people who should not be having one. They put out blatantly false and misleading ads. Besides the fraudulent positioning of the interest rate, they dangle promises of fantastic wealth and luxury before a dewy eyed vulnerable guy. They promise "instant" cards - all you to have to show is that you are a living human being. They pester you on the phone with unwanted sales calls. They even send you a card in the post without your asking for it (the number of times this has happened to me is not funny). They stand outside my office building in colourful booths with nice pamphlets and pretty young things, ready to ensnare some unwitting soul and lead him by the hand into doom. They make it easy to have the first fix. they even give you the second and third fixes before you have had to pay for the first one. And then when you are truly hooked, they come at you with knives and shotguns. The only difference I can see with a drug dealer is that he stands in the street corner, while this lot stands in the middle of the street.

Yeah, we live in a free world. People can do what they want and must take responsibility for it. Oh yeah - then why don't we legalise marijuana, cocaine, ecstasy ...

I unfortunately know of too many people who have been ruined by this drug. I know of a guy who 's credit card company had started to directly recover from his salary and his monthly take home income had come to Rs 400 ($ 10). I know of a guy who became bankrupt after 15 years of working. I know of a guy who was beaten by an over zealous recovery company while his scooter was being repossessed. I know of a girl who's family had to sell the mangalasutra (in Indian tradition this is the symbol of a married lady and something you would never never sell) to keep up with the monthly minimum payment on the card. I could go on and on.

Hopefully technology changes will render this industry obsolete. Payments through mobile phones will become more and more popular. Other online instruments will come into being. If the present financial crisis has any positive fallout, it might be that easy credit might not be there anymore.

When this industry fades into oblivion, If I am around, I will write a long obituary. Unfortunately, I don't think this will permanently go away, just as drugs will never go away. Meanwhile I will contend myself with ranting.

4 comments:

  1. What a coincidence! I was told yesterday that the credit card has the highest interest on cash advance. If you borrow cash RMB20~30K from credit card and pay minimum payment by 10%every month, it might take your whole life to clear the debt.

    ReplyDelete
  2. Okay - the credit card companies lure you. But why can't people learn to say no.

    Don't you think the individuals are equally responsible or irresponsible? It happenned with the 'nidhi companies' and 'mutual benefit comopanies' as well. People fell over each other to deposit money in them for the 'attractive' interest rates offered and then blamed those companies when they lost their money. Not many paused to think if the schemes were viable. Probably they do not think at all!!!

    ReplyDelete
  3. Yes Carol, hence my strong words. It can ruin somebody if she isn't careful.

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  4. Agree CMK - Nothing can replace personal responsibility. But not everybody is strong always and that's why we ban advtg on cigarettes and declare war on drugs. I see this not very much different and therefore companies must also be more responsible than what they are now. Having said that, if somebody still does a silly thing, he deserves the kick.

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