New Delhi: With a high percentage of Indians going on a spending spree, more and more Indians are using credit cards today. However, many people do not fully understand the usability of the product, leading to major problems and financial losses at times.
So, what are thumb rules to make the maximum gain out of plastic money? Two experts in this field – Roopam Asthana of SBI Card Services and Bejon Mishra of Consumer Voice – shared some tips on how to make best use of credit cards on the CNN-IBN Money Special programme, Swipe Smart. The interaction was moderated by Fatima Karan.
First, the basics and the right approach.
Why use credit cards at all?
Roopam Asthana: Credit card in reality is a payment mechanism. It is meant for the safety, convenience and ease of transactions for a consumer. There is another aspect of credit card, which is really the credit piece on the credit card. And that is supposed to be used to match the short-term cash flow mismatches, which a customer might actually have.
Should one use credit cards at all?
Bejon Mishra: Credit card is a tool to enhance the purchasing power of the consumer and it facilitates to get the additional value of money.
How many credit cards should a person ideally have?
Roopam Asthana: Ideally, a person should have only one credit card. Because, the way the system operates, there is very little chance of failure as far as the transaction is concerned. So, in my opinion, a person should have only one credit card.
Buying on credits lead to interest-free purchase. What is this interest-free purchase?
Roopam Asthana: This is a very important question you have asked Fatima. This aspect of credit card is very very unique aspect, which is not available on most of the other products, which are available from banks. On a credit card, when you make a purchase and you actually pay a bill in full, for the entire period you borrow the money from the credit card issuer. And you actually do not pay any interest on that borrowing.
What happens if you do not pay your bill in full or you pay only in part is that, from there on, the balance that you carry forward, as well as all future transactions will actually accrue interest.
And is that the experience with you also?
Bejon Mishra: Well, he has given an SBI viewpoint. As a consumer, I would always go for at least two (credit cards) if not three. If you can manage three, it is very good, but at least two. Because, you must be able to compare the companies in terms of their services. So, you can’t only stick to one card. Not only you can compare the services, but can use the tool to its maximum available limit.
Lot of customers pull cash from credit cards. Is it a bad idea?
Roopam Asthana: Cash aspect is another facility available on credit cards. And what I tell consumers and credit card holders that they should use the facility to draw cash from credit cards only in case of emergency. And in cases where there are merchants who do not accept credit cards and you don’t have cash in your pocket. The availability of ATM – which is so widespread now – does help you in that situation.
What should a consumer look forward when they go out looking for a credit card?
Bejon Mishra: The first thing you should look forward is what are the additional facilities you are going to get from the bank in terms of taking that credit card. And you should never use a credit card for taking a overdraft or taking cash. In emergency - Yes, but it should be for very short-term. But you should not become habitual of taking money out of credit card. And if you do so, you should use debit card more rather than credit card. So there is a difference in a debit card and a credit card.
What are the basic services a good credit card should provide?
Roopam Asthana: The basic service – as I said – it is a payment mechanism. So, it should provide you the ease of transaction, which means every time you use your credit card, it should work – that’s the first service.
The second is in terms of communication with the customer – you should get your bill on time, there should not be any unwanted charges on your credit card, the fees and charges should be very very transparent and you should be made aware of it.
And at the end of it is the service. You should be able to get in touch of your card-issuing organisation 24x7 – either on Net or on telephone.
What about debt when it is growing? We have people who started using credit cards, they don’t necessarily manage to pay off their balances on time. What do you suggest to one whose debt is growing? We keep saying attractive offers from zero balance transfers, what’s that all about and should people instead think of another way of paying off their debt?
Roopam Asthana: Consumers have to borrow responsibly and I think Mishra has pointed out on that. I have a rule of thumb. My rule of thumb is that, if you have a borrowing on credit card, which you believe you can’t repay in six months, you should have looked at other means of financing that debt.
Part two is in terms of zero per cent balance fund transfers and other such offers. These offers are obviously very very attractive and as long as you do use them responsibly and you do not grow your debt to an extend that you are not able to repay it over six-month period of time. But my suggestion is stay away from them. Because there are some fees and charges involved in a zero per cent balance transfer and it could lure you to grow your debt to a proportion which may not be handled.
What to do when your debt is growing?
Bejon Mishra: Debt is not necessarily would be your financial constraint. Sometimes debt is carried forward because of dispute. I want to pay but they don’t want to take the money because of the dispute and debt keeps increasing. So resolution of the dispute is critical. It is not necessarily always irresponsible financial transaction, between the consumer and the provider, but many times we have seen that debt gets created because of breakdown in communication between the consumer and the service provider.
What should a consumer do when the balance is going on and on, which we could see very often?
Roopam Asthana: What happens to most credit card issuer is actually that the service helpline or the customer service centre has been empowered to take a decision on number of things including reversal of certain fees and charges. So that is really the first port of call and thereafter there are various modes of communication available either through the Website or through by escalation or ultimately going to the banking ombudsman, which is a mechanism, which put in place by banking regulators.
Relationship between the card provider and the card holder:
What information should a card provider give their customer?
Bejon Mishra: First is any communication has to be very simple, easy to understand, crisp and in the language that consumer understand. I don’t want to see English everywhere. May be I want it in Gujarati, so it has to be in Gujarati. So it has to be in the language I understand.
Number two, it has to be in writing – it cannot be verbal. You just can’t tell me in telephone that I give you this for your card and that’s it. And then I keep chasing you. Because given on telephone, I can’t give an evidence that somebody said this to me, when the card was sold to me.
It sounds like a nightmarish situation. Do banks have a solution for such a scenario?
Roopam Asthana: No, I think there is a regulator, which is the Reserve Bank of India, has been very proactive in formulating – what they called is – New Credit Card Guidelines. New Credit Card Guidelines have actually stipulated what needs to be communicated to the consumer at the time when you approach him to make a sell and later when actually sell him the product.
There is a very nice document, which is called the Most Important Document of Terms and Conditions, which every credit card issuer has to provide the consumer both at the time of sell as well as when the product is actually sent to the customer. It includes information like what are the fees, what are the charges, how does your interest gets calculated, what should you do in case you lose your card, how should you actually cancel your card in case you need to.
What exactly is the guideline?
Roopam Asthana: What a credit card guideline does is – it gives the credit card issuers some guidelines on how they should interact with consumers. For example, when you change your fees and charges, you should give at least a 30 days notice period to consumers. It also gives guidelines in terms of sales that are made through third party agencies or the collections and debt recovery done through third party agency. So it covers a wide-ranging set of topics that covers by RBI through this credit card guideline. But the most important piece is really this Most Important Document of Terms and Conditions. And I would actually urge every consumer to read that when they get their credit cards.
What about consumers and their credit history? What makes for a credit history for a consumer?
Roopam Asthana: A consumer’s credit history is going to become more and more important as we go ahead, because we are a developing market. And today the whole importance of consumer’s credit history is not very clear either to consumers or to the lender. But with the emergence of credit bureaus, this going to become very very important and consumers must be aware of this. The fact is that, if they have a poor credit history, that means they are late in making payments, or they have not made payments - it could actually affect their further borrowings. Their rate of interest could be higher or they might actually be cut out.
People have had credit history imposed on them in terms of wrong doing in the sense that a person never default in making payment. He didn’t make any mistakes. But according to some records of some banks, he falters. What happens to such situations?
Roopam Asthana: The consumer should approach the lender which has reported that credit history and sort it out with the lender. That is the way and means of taking care of that.
What should a customer do in such a situation?
Bejon Mishra: Most of the time consumers are not aware of it. And even when they try to seek that information, it’s a Herculean task to get it. So, it is not friendly at all and that’s why the RBI guideline is a good kind of document, which is come out.
But now we have to see that how much seriously they implement it and that is why we are keeping a watch, measuring them in terms of that guideline that RBI has brought in and a kind of study we are doing with the service providers.
How far can a company legally go to collect debt?
Roopam Asthana: The whole issue of debt collection with credit card is more acute because it is the most unsecured form of lending. Our first approach is to get to the consumers on telephone. Because with the emergence of telecom and penetration of telephone across the country, we have found that is the very good means of getting touch of the consumer.
Only in cases where we find that we are not able to get in touch on telephone, and get a promise for a payment for the amount due to the card issuer, we actually try to get in touch with the customer through physical contact – which is to send people to find out if the telephone number has changed or the address has been changed.
Is it legal to send people to find out verses, say goons being send to extract something?
Bejon Mishra: The kind of feedback we are getting from consumers is that these mechanisms are completely unfriendly. Even the first call that comes in telephone is so demanding…
What should consumers do?
Bejon Mishra: Consumers must understand that at one point of time they have to pay and what is that time going to be that the consumer has to decide. And once they make that promise, it’s equally important for the consumer to hold on to that promise.
How confidential is the card holders’ information once they signed on for that card?
Roopam Asthana: The card holders’ in formation is very confidential and it is kept by the card issuer. There are very very strong guidelines, which are prescribed by the RBI, which prohibits sharing of the information. Even we as a subsidiary cannot share it with our parent company.
Say one doesn’t want to get contacted by anyone. What does he or she do?
Roopam Asthana: Today, if I am not mistaking, all card issuer have in their website have a registry, which is called ‘do not call’ registry, so the consumer can actually go to the website, go to the ‘do not call’ registry and put in their name, addresses and telephone numbers to make sure that they are not contacted by the card issuer in future.
What can a consumer do if he or she continues to get telemarketing calls?
Bejon Mishra: As soon as I get disturbed out of the information I shared with my banker, I must inform my banker that, look this is not done. So there should be an easy mechanism of feedback collection.
Your Problem, Our Solution:
Siddharth from Chennai: How secured are the Internet payments that I make?
Roopam Asthana: Very very simple and commonsensical approach to the situation – do not use your credit card at websites, which are by fly-by-night operators.
Is one completely secure on a website like amazon.com?
Roopam Asthana: With the large websites, the way credit card operates, is operate through payment gateway. Which basically means that credit card information never flows to the merchant itself and it goes to the bank or the financial institution, which is clearing the transaction. So from that point of view, I think those transactions are very safe.
Please give three recommendations for credit card holders.
Bejon Mishra: Don’t get carried away by free bees. You have to seek information before you start using the card – take everything in writing, and use the tool very responsibly; it is a very dangerous tool if it is not used responsibly.
Roopam Asthana: One, read terms and conditions. Number two, act responsibly, and pay your bills on time. And number three, act responsibly in terms of building your debt – don’t overdo your debt build up.