The Credit card Generation

PLASTIC MONEY: This month is a wonderful time of the year for one of the banking industry's lucrative businesses: credit cards. In the coming weeks, thousands of urban Sri Lankans will reach into their wallets and use plastic to buy billions worth of holiday gifts. But, at what cost?

It seems that the magical convenience of plastic money is becoming critical to our urban consumer economy.

It is estimated that more than 650,000 credit cards are now in circulation and they are fast becoming lifestyle products. Today, in city circles, the choice of the credit card you use is meant to express your lifestyle preference.

The following figures taken from the Central Bank reports prove the point.

Financial Transactions by Credit Cards

           Transactions            Value

2003     7.7 m                      23.0 billion

2004     9.7 m                      33.0 billion

2005   12.0 m                      42.0 billion

The industry's most profitable customers, however, the ones being sought by creative marketing tactics, are the "revolvers" - meaning, thousands of customers who carry monthly credit card debt.

Unfortunately, these are the same people who are not aware of how long it can take to repay a debt when only paying the minimum each month.

Globally it has recently been suggested that credit card companies include a warning on their statements discouraging customers from paying only the minimum. However, only a very few international companies have so far acted upon it.

Starting in 2006, most USA credit card companies regulated by the Office of the Comptroller of the Currency have been required to increase the customers' minimum payments to cover at least the interest and late fee charges from the prior statement plus 1% of the outstanding balance.

The reason is to avoid a negative amortisation situation. Penalty fees and rates are sometimes triggered by just a single lapse - a payment that arrives a couple of days or even hours late. And, there is also a long list of other charges, from interest to insurance charges.

This flurry of unexpected fees and rate hikes come just when consumers can least afford them. When asked for their comments, the credit card company defends industry practices.

Because the credit card business is basically unsecured lending, they would say, the risks associated with the business must be offset. Hence the charges.

According to the Central Bank, the interest rate on outstanding credit of credit cards in Sri Lanka has increased from a range of 21 to 33 percent in 2004 to 29 to 33 percent in 2005. By 2006 it has touched 36 percent.

This figure is amongst the highest in the world. The credit card industry presumes, based on happy experience, that Sri Lankans will borrow more money each year to support their spending habits, regardless of the direction of interest rates, and that enough consumers will be happy simply to pay off just enough debt to allow them to borrow more.

So the point is - the industry is operating without fear of penalty. There is no regulator, and there is no customer who can bring this industry to heel.

It is time we evolve a code of conduct for issuing credit cards and also a regulatory mechanism for credit cards. Trends around the globe indicate that a strong regulatory mechanism is the only way to control the growing credit card menace.

In recent times, attitudes to credit and economic conditions have changed with the result that credit transactions - and levels of personal debt - have arisen markedly.

In this environment, there is an essential need for a robust regulatory framework to govern lending transactions. Sound credit card regulation has proved very difficult to design, but fortunately, there are many lessons that we can learn from efforts of other countries.

Regulators in most countries have put a cap of "reasonable" percentage and laid down minimum salary requirements for issuing of credit cards. In Hong Kong, steps are afoot to force banks to use a common formula to disclose the 'true' cost of credit card borrowing.

The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly allowing the reader to compare the features of all the cards in the database.

A credit card can be an asset in the hands of a prudent spender. But, for others, Credit card debt can often be crippling and lead to a lot of stress. With the increased use of credit cards, more and more people are falling into debt. While credit card debt is fairly easy to get into, getting out is a hard and long process.

No agency or system will get you debt free in one day. It will take a long time to bring your debt under control and to start rebuilding your credit. Credit cards do not merely represent a miraculous piece of plastic that can be used in millions of establishments across the globe to pay for stuff, or swiped at ATMs to get cash. It is very much more than the advertisements say in big bold letters.