Pros and cons of using a credit card

by Gamini WARUSHAMANA

Electronic payment systems are becoming popular in domestic trade.

Among many card payment methods the credit card is dominating the industry and as a result the consumption pattern of the people are changing creating positive as well as negative impacts on household economies.

Saman Kumara, a government servant with a monthly salary of around Rs.30,000 uses two credit cards, one from an international bank and the other from a local bank. The total credit limit he has is Rs. 75,000 and he said he has made maximum use of both cards.

This means he has already spent over two months salary in advance. Last month he paid over Rs.900 as interest and over Rs.800 as late payment fees.

Some people are caught in a credit card trap. Late payment charges, high interest and interest calculation systems are the main complaints from customers.

The Government also charges 1% stamp duty on credit card payments and it too adds a significant cost on card users.

Sujatha, a private sector executive said the interest charge on her credit card from a reputed international bank is unfair.

I had Rs.10500 due and paid Rs.10,000 but the bank had charged interest for the whole amount Rs.10,500. Late payment charges too are extremely high, she said.

Sumanachandra, a private sector employee said that he optimally use his credit card and it is convenient and the cost is affordable because he manages it wisely.

I purchase all consumer durables from supermarkets using the credit card and use the card to pay bills.

I pay the total amount within the grace period and therefore there is no huge interest charge.

However, the banks that offer credit cards have different views on these complaints of high cost.

The Chief Manager of Sampath Bank card centre Nirosha de Silva said that credit card interest rates are not high compared to other short-term credit facilities offered by the banks. Banks charge around 3% monthly interest rate for credit cards and it is 36% annual interest. Even the interest rates for Temporary Over Draft (TOD) are also in 29-30% range. But obtaining TODs for a person is not easy and they are not issued on the disposable income of a person.

Credit card holders have more facilities. For instance you can pay bills from abroad in foreign currency.

To provide this facility the banks use infrastructure facilities of other banks and financial institutions and banks bear a huge cost for this, she said.

De Silva accepted that there are a lot of other charges on credit cards and some of them are unfair.

Generally banks have 28 charges on credit cards and recently Sampath Bank slashed 24 charges and today we have only four charges; interest, late payment fee, card fee and excess limit interest.

Not only the interest rate, the method of interest calculation is also important.

Sampath Bank gives a minimum 21 days and maximum 51 days grace period from the purchase day, she said. She said, that there was a drop in new credit card sales and card transactions but this year it is picking up again.

After the recent promotion there is a significant increase in new card issues, she said.

The Head of the cards and consumer assets of HSBC Nadeesha Senarathne also does not agree that the credit card is the most expensive payment and credit system.

He said that it is a payment solution that provides financial flexibility and convenience.

We believe it is much safer than using cash. Also, with the monthly statement of your account you have better control of your expenses when you use your credit card, he said.

Responding to complaints by the customers on high interest rates Senaratne said, " we provide interest free credit up to 51 days and in addition cardholders also enjoy the benefit of interest free instalment plans for up to 36 months at some key merchant outlets".

In addition to offering interest free credit, cardholders can also enjoy discounts ranging up to 50% on shopping, dining and lodging with our year-round offers and special benefits such as Cardholder Dines Free and Cardholder Stays Free. When you consider all these benefits you enjoy better value for money with your credit card.

Additionally cardholders also earn loyalty points every time they use their card, and could redeem them for free groceries, shopping, dining and travel.

HSBC cardholders also enjoy a refund of the fuel surcharge when they use their card for fuel purchases.

Referring to the costs associated with credit cards Senaratne said that HSBC provides globally recognised and accepted cards, a transaction tool that can be used locally, overseas and even on the World Wide Web.

There are no additional fees and charges on these facilities and the banks have to incur a substantial cost in maintaining this network. In addition the cost of funds in providing interest free credit too is relatively high.

We provide a secure card that is enabled with a CHIP technology and this cost too is borne by the bank. In addition we need to price the cost of our loyalty and discount programmes too.

As we do not have a sophisticated credit rating system cost and fraud losses too are relatively high.

It is also important to note that a credit card is issued usually completely free of security or guarantors and is a high risk credit instrument from the bank's perspective and the applicable interest rates are therefore higher than for secured credit facilities.

He said that by and large the fee and cost structure of the card business across the world remain the same, but with the improved infrastructure and credit rating systems in developed countries, the cost of processing and providing credit could be relatively low, therefore they could pass on such benefits to the consumer.

He also said, that last year there was a decline in the overall industry, but now there are improvements with a good April season.

"We hope to continue to introduce more benefits and privileges to our cardholders to ensure our cards will be their preferred choice of payment" he said.

The common view of all card users is that it is convenient. Some of them have fear of the safety of the credit card but most of them have not faced any such issue.

One card holder explained his experience and said "I used my credit card in Singapore to purchase some stuff at a supermarket. My first transaction was successful. But when I used my card the second time the card was suspended.

When I returned home there was a letter from the bank stating that my card has been suspended and to call immediately to the bank. When I called the bank the officer said that my card has been used in Singapore without prior information to the bank and he told all the attempts I made to use the card with the name of the supermarket and the book shops.

Therefore the safety of the transaction is ensured up to some extent by the technology used.

Safety of payment cards should be improved further said the General Manager of Epic Lanka, Viraj Mudalige. Epic Lanka is a reputed software company specialising in secure electronic payments, information system security and banking solutions.

He said that globally the card frauds are significantly high and VISA and Master cards report US$ 556 million annual losses due to card frauds.

In Sri Lanka US$. 2.2 million annual losses are reported according to the latest statistics.

In Sri Lanka we still use 1990s technology and there is no guideline for banks to adopt new technology to prevent card frauds.

Many countries such as Malaysia, Singapore and India have given guidelines to banks to implement solutions to prevent card frauds, he said.

Mudalige said that five threats have been recognised in the payment card industry; eavesdropping, usage of ghost terminals, line or wire tapping, host spoofing and replay attacks. Broadly two solutions can be used to prevent card frauds; introduction of smart cards and encryption of data.