Honey, I shrunk the card

If the soaring prices of everything around you haven’t already curbed your credit cardflashing instincts, then the latest move by banks certainly should. Most banks have quietly increased the monthly charges on their credit cards by up to 0.5 basis points, thereby pushing up the Annual Percentage Rate (APR) on the outstanding amount to a whopping 49.36 per cent.

ICICI Bank, for instance, has revised the monthly charges on its credit cards from 3.15 per cent to 3.4 per cent, while Citibank has raised it from about 3 per cent to 3.5 per cent and the Netherlandsbased ABN AMRO Bank from 3.1 per cent to 3.2-3.5 per cent. Says Sachin Khandelwal, Head (Cards Group), ICICI Bank: “From the standard 2.95-3.15 per cent per month that most banks were charging till a few months ago, most credit card companies are now charging between 3.25 per cent and 3.4 per cent interest per month.”

Analysts believe the move stems from the increasing financial pressure on credit card companies, who are only now beginning to meticulously examine the individual’s creditworthiness to minimise risk. Says Tarun Bhatia, Head (Financial Sector Ratings), CRISIL: “Traditionally, credit card lending has been the riskiest personal debt for banks to hold. Unlike house or car loans, these loans are not secured by collateralised real property that banks can seize if borrowers fail to make payments.

Credit card payment is something on which customers usually default first during troubled times.” Indeed, the default rates on credit cards have gone up in tandem with the rapid increase in credit card usage in India—over 27 million Indians now possess credit cards.

“Default rates have climbed by almost 200-300 basis points this year to 12-15 per cent, compared to 9-10 per cent last year. It is because banks have gone into Tier II and Tier III towns as well as to lower-income segments,” explains Bhatia.

In addition to the monthly interest rates, some banks have also reduced the free-credit period. ICICI Bank credit card customers, for one, will now get only 48 days to make payment sans interest compared to 50 days earlier if they plan their purchases a day after the billing date, which falls on the 21st of every month. Says Khandelwal: “We have come up with a concept of ‘tiered pricing’ whereby some of the customers have witnessed a rate hike in credit card outstandings. The interest rates we charge depend on the customer’s card usage behaviour.”

Most credit card users lose money because of the inordinately high cost of credit servicing. Says Bhatia: “With average interest rate being so high, you stand to lose hundreds or even thousands of rupees in finance charges.”

So, what should you do? Don’t just keep to the minimum repayments on your credit card. Take control of your debt and repay as much as you can afford each month. Doing so will knock years off your credit card debt and save you a fortune in interest. Also, get a handle on your card-flashing habits.