Banks increase interest rate to 51% per annum on credit cards

Advisory on Credit Cards

Credit Consumers Association of India advises all credit card holders to exercise utmost caution in the matter of using credit cards.

All credit card issuing companies and banks have raised the interest rate on these cards to 3.15 to 3.5% per month translating to an annual compounded interest rate of 51%.

With credit card holders being asked to pay just 5% of the outstanding amount, the danger of negative amortization (your outstanding amount increasing every month even after paying 5% of the bill amount) has increased.

Illustrative Example

Balance Outstanding	Bill Date	Outstanding	Purchase	Purchase Date	Payment Date	Payment @5%	Interest/Day	Days	Interest for the Period
0	10/07/2008	0	2000	15/07/2008	20/07/2008	100.00	0.00	0.00
1900.00	10/08/2008	1955.42	0		20/08/2008	97.77	2.22	25.00	55.42
1857.65	10/09/2008	2010.83	0		20/09/2008	100.54	2.17	30.00	65.02
1910.29	10/10/2008	2075.85	0		20/10/2008	103.79	2.23	30.00	66.86
1972.06	10/11/2008	2142.71	0		20/11/2008	107.14	2.30	30.00	69.02

Thus if you made a purchase of 2000/- and then kept on paying the minimum, your outstanding will actually increase instead of decreasing. This happens because the rate of interest is 3.5% whereas the rate of repayment of principal is just 1.5% of the total outstanding.

We request all credit card holders to

1. Seek immediate help in case you are making just the minimum payments.
2. Always make a payment of at least 10% of your outstanding amount.
3. Make payments at least 3 to 4 days before the due date.
4. Keep record of all payments made.
5. Never make payments to collection agents as this involves collection charges.
6. Keep your card usage below the credit limit.
7. Carefully watch your card limit as your bank may suddenly and without notice decrease your credit limit and then charge you for over limit charges.
8. When you go over limit, you do not have any grace period for payments. Make payments to reduce your outstanding below the credit limit and make payments before the bill generation date.
9. Pay off the full amount on your credit card before the due date to enjoy 50 days of free credit.
10. Refrain from using credit card for cash withdrawal as this attracts finance charges from the date of withdrawal and also any subsequent purchase also carries interest charges.

The best way to avoid falling into a debt trap is to completely avoid using a credit card. Use a debit card or cash to make all your purchases. Learn to live within your means and use a credit card only in an emergency!

Credit-card debts may lead to plastic meltdown

Credit counsellors and financial analysts in the US and the UK are seeing evidence every day that credit card debts are increasing. Soaring fuel costs, rising food prices and climbing energy bills are all being kept at bay with credit cards. Shortfalls on mortgage repayments are also being made up with cash from credit cards. Many of these debt soaked consumers were already struggling to make their minimum monthly repayments.

More than $1 trillion is held on credit cards in America. In the UK, debts of more than pounds 50 billion have been run up on the plastic. Across the world, somewhere between $2-3 trillion is owed on credit cards.

Up to now, the credit crisis has passed by without plastic going into meltdown. Statistics have shown steady levels of arrears and suggested that many consumers have been successfully paying off part of their balances. Now there are increasing signs that this last breakwater, shoring up the economies of the western world, is about to crack under ever-increasing strains.

“Credit cards are definitely going to be one of the next big problems,’’ said Steve Nuttall, head of the financial-services research group at polling company YouGov. “Our research shows that everything started to fall off a cliff in about March or April and that should begin to show up in bad-debt charges by the end of the year.’’

The US Federal Reserve has also been warning credit-card lenders not to push their luck. The regulators are fearful that the economy could crack if consumers start being hit with higher fees and steep interest rate rises. The problem may be even sharper in Britain.

Analysts always say that “the markets get it right’’. Current market prices suggest that over 20% of the money owed on British credit cards is unlikely to be paid back. That would be almost three times higher than the previous record for bad credit-card debts, eclipsing the problems witnessed in the last housing crisis of the early 1990s.

“We are already hearing stories about people using their credit cards to keep up with their mortgage payments,’’ said Peter Crook, chief executive of Provident Financial, the doorto-door moneylender. “If that’s what’s happening, it’s a big red warning sign.’’ The recent Bank of England credit-conditions survey revealed that banks were surprised by the level of bad debts run up on their credit cards in the second quarter of the year. Demand for credit cards also increased as banks tightened their lending criteria across the board.

The UK’s debt-strapped consumers currently owe a staggering pounds 56 billion on credit cards. According to figures from Apacs, the payments network that supports the British banking system, this could climb to pounds 160 billion if those 31m cards are used to the max. The figure takes account of all the measures already taken by credit-card issuers to clamp down on borrowers by rejecting card applications and cutting credit limits.

YouGov’s research suggests that 15% of the British public is now behind on at least one bill of some kind or another. Of those in trouble, 38% say they are behind with utility bills or council tax, while 31% cite credit cards as their big problem.

Problems in credit-card debts have the potential to send a new wave of panic through global financial markets. Roughly $600 billion of debts run up on credit cards world over swill through the global financial system. Credit-card debts were packaged up and sold on by banks during the boom years, just like mortgages and car loans. THE SUNDAY TIMES

Bad Karma catching up with MNC and Private Banks

A news report today in leading newspapers in Mumbai talks about CitiBank planning to sell its swank headquarters in BKC.

It is a typical case of bad karma catching up with the bank.

For years, Citibank and similar foreign and private banks lobbied with the mandarins in the law making institutions to offer products and services whose cost was way prohibitive for the common man.

They set up honey traps by offering easy credit through credit cards, personal unsecured loans and other such instruments where the interest rates were portrayed to be unregulated by the central bank. They charged interest in the region of 35 to 85% all in the name of unsecured credit.

These bank employed bright kids fresh off the MBA mill to sell these products and services. These kids were offered heavy salaries and pushed into achieving sales targets for the bank’s dubious products. To recover the small loans issued to masses, these banks hired dubious agencies purely on commission basis thus transferring the cost of their entire operation on the poor borrower.

Stories of mental, physical and financial harassment abound. Bank managers and officials ruthlessly went around first distributing money and then recovering these small loans.

Small borrowers, people who borrow 40,000 to 50,000 rupees (1000 to 1250 US Dollar) could be easily browbeaten into submission. Armed with a central bank looking the other way and legislators not bothered about the rape of the common man, these banks systematically looted the common man. Many were driven to commit suicide, many marriages went bad and many people’s families were destroyed.

All this has created a lot of ill will amongst the people and it is now translating to these very same banks facing collapse for deeds done by the managers who were supposed to make the bank grow. The sub-prime crisis in United States and its fall out on the world financial system is having its echo here in India too. These banks are now left holding the baby.

Soon these bank managers who were getting fancy salaries and perks will be also laid off. Banks like CitiBank will have no option but to cut all the flab. With share prices of the bank falling to 16$ from a high of 65$, it has already seen an erosion of 75% of its value. There is more to come from where all this came from and boy am I happy!

It is the bank’s bad karma that is catching up with them.