Financial Daily from THE HINDU group of publications
Tuesday, Jun 22, 2004

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Credit trap

IF YOU are a professional or in employment or an investor in the bonds, deposits, securities or other financial products of a bank, you should be surprised if you do not get at least a dozen calls a month, including a couple of private visits by marketing agents, to impose on you a credit card which, they claim, is better than all other cards in the market.

Some simply despatch the credit cards through couriers without your asking for it, stating you are "privileged customers" chosen by the bankers for reasons unknown! With an insatiable thirst for spending and increasing options to spend, it is mostly the middle-class that fall prey.

Worse, from proudly owing one credit card, they soon become honoured clients of different bankers and, if not careful, end up in a debt-trap and, identified as defaulters, experience the more surprising consequences of the wrong side of (dis)credit cards! Here are some of the essential inputs for credit card-holders:

Beware of the prohibitively high interest of around 35 per cent per annum, when the cost of all other loans in the market has come down to less than one-third of interest on credit extended by these cards. Make money from the market work for you, rather than you working to enrich bankers! All credit cards extend interest-free credit facility for some days (usually 30-45 days). Enjoy that credit period and pay the full amount without using instalments, in which option you end up paying high interest.

Carefully check monthly statements, and more carefully watch the yearly service charges. Most cards offer `credit points' on purchases, which can be later adjusted against annual service charges. Verify whether the legitimate credits/adjustments are done to your account every year.

Do not get lured by prizes/ gifts of sorts announced on the flashy covers of credit card statements, that if you purchase frequently (some even lure you into everyday purchases!) you would be awarded prizes. You may end up without prizes and money!

Set your own financial limits, rather than looking at the limit the banker sets. Be conscious of the practice that some lenders resort to different techniques to recover their dues. In an essentially savings-oriented economy such as India; the savings options have become very limited, but spending options are ever increasing, catalysed by these cards.

To be fair, one should grant the advantages of credit cards. On a busy festive day, it is better to carry cards when shopping than cash, which could be risky. If judiciously used, it is certainly an essential facility.

But the pieces of plastic should not dictate your spending pattern. It is time the RBI reviews the credit card market and regulates it, before the defaults increase to alarming proportions, hurting the public and the banking community.

K. Ramesh

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