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With consumers failing to put a pause on consumerism despite rising interest rates, it becomes all the more essential for credit card users to be prudent in use and payment of dues to avoid a fatal debt trap that can wreck their financial health, says sunanda roy
“Oh, they are so essential these days.” Well, those were the words of an executive of an online portal when he was asked what he thinks about the usage of plastic money. He even showed some 2-3 credit cards of different banks and equal number of debit cards on the flip side of his wallet to prove that he is not lagging behind others in the use of plastic money. Definitely, plastic has transformed itself from a mere status symbol to a very essential commodity in recent times.
Both the volume and the value of transactions on credit cards are on rise like never before. As per the Reserve Bank of India’s Annual Report for financial year 2007-08, total value of transactions made on credit cards during the year amounted to a mind-boggling Rs.579.58 billion, up 40.1% from Rs.413.61 billion, the total amount spent by credit card holders during FY 2006-07. The total number of credit card transactions too have jumped from 169.5 million to 228.2 million, registering a whopping 34.6% growth as against a measly 8.6% growth in the previous financial year. A mere look at these figures clearly justifies the fact that the ideology of cashless shopping is roping in more Indian consumers than ever. In recent months, banks have been able to tempt more people to use more of their credit cards, simply by putting in place schemes like cash-back, discount purchases, free air tickets and so on.
Rabindra Gupta, a modern day executive says, “It makes your life really easy. You cannot carry cash in your wallet always; but with a card you can just swipe and shop whenever you feel like.” As per a banking analyst, “While simplicity of making payments is one of the primary drivers for growth of credit cards, growth of e-commerce has also stimulated its usage. So much is its utility in the modern times that it has become an integral part of our lives.”
But while the dependency on plastic money has made our lives easier, it is also driving toward a fatal debt trap. The best as well the worst part of using a credit card is you can buy today and pay later. And you can get your hands on a product even if you don’t have sufficient money with you. Now for the worst part, which many of us don’t take seriously, is that you tend to defer your payments and in the process incur huge amount of penalties and other charges. As a result, consumers end up paying an obscene amount for something which is higher than what they should have actually paid.
How the sharp increase in the usage and average spend through credit cards has led to piling of outstandings and payment defaults can be well understood, in fact, from the latest RBI statistics. According to the RBI Report, outstanding on credit cards went up by a massive 87% to Rs.265.96 billion by the end of May this year.
To be fair, another reason that has contributed to this large credit card outstanding is the surge in interest rates recently. Correspondingly, the financial load on existing and new consumers of personal, car or home loans has gone up, condensing their disposable income. But clearly, this has not put paid to their already high aspiration level and therefore conspicuous consumption. With the result that plastic money usage and defaults in payments have seen this alarming rise. Amount due on these people now constitute a major chunk of the huge credit card outstanding at present. What’s more relevant is the fact that if these people do not pay up in the near future, this debt trap will continue increasing.
To stay away from such chaotic situation, banks are now encouraging more and more borrowers to convert their credit card dues into personal loans in a proposal to stave off defaults prompted by inflation and rising rates. For a consumer with a large credit card debt, such a scheme is not bad. Because, dues under a credit card debt after the initial interest-free period draw interest rates to the tune of 18 to 38% per annum, where as personal loans are still hovering at rates starting from 14%. According to Robin Roy, Associate Director, PricewaterhouseCoopers, “The darker side of the story says that in the course of using a credit cards one keeps on postponing the payment. But while it’s a personal loan, there is a fixed repayment schedule. You are compelled in some kind of discipline.” This, for sure, will help you move out of the vicious circle of the debt trap. To err is human, but to recover from it is definitely intelligence. And in today’s world of high consumerism every one, who uses a credit card, has to show some of that intelligence to be safe and sound in terms of their financial health and planning.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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