The use of credit cards does offer a lot of other facilities also

Sep 11 - Sep 17, 2006

You have to admit the TV commercials are enticing and unavoidable too. They show young couples dressed immaculately, in extremely posh settings, out for an evening on town, having time of their life. All made possible by a small piece of plastic which one could carry in the wallet. Turn on the radio and you can not help but notice an offering made by one of the credit card companies that the easiest way to see the finals of sporting events in other countries is by doing nothing other than shopping on that particular credit card. Rake up enough bills by shopping and may be you could be the lucky winner in the draw and end up in one of the exotic places to see a sporting event. Again, one has to admit the offer is exciting.

There has been a tremendous increase in the use of credit cards ever since they have been introduced in Pakistan. What do they have to offer? Undoubtedly there is convenience, there is ease and they there is prestige which our youth is very sensitive about. This has not been lost on our marketers who have their finer on the pulse of our youth and hence TV commercials show all the yuppies enjoying the fruits of easy credit.

The use of credit cards does offer a lot of other facilities also. It obviates the need to carry wads of currency bills in the wallet which one was used to hitherto. It becomes a defacto ID card. But then life is never so simple. Having credit cards brings a host of other problems also. It requires a sense of discipline. The charges once raked have to be paid also. The credit cards are facilitators, but they are not the cash itself. They just facilitate the borrowing and that to at a premium, which is very high. Yes it is high enough to pay for all the commercials that you watch on the TV. The use of credit cards have given birth to another phenomenon which was not existent in Pakistan before, that is, the debt trap. This has already been seen in the other countries which have been using the credit card for some time such as in the West. It is estimated that on average the people in US are caught up in the credit card debt to the tune of USD11000/-., roughly 600,000 to 700,000/- rupees. One should note that this is in spite of the interest rate on credit cards in the west being in the range of 12 to 14 APR. On other hand, the interest rate in Pakistan is at least twice comparatively, if not more. It would be only logical to deduce that same kind of debt trap will result here also in Pakistan as abroad.

What is the attraction of owning a credit card. If it is considered abroad, the top reasons are ease and facility. This and desire to impress your neighbors/ friends motivates us to sign up on the dotted line and acquire the coveted plastic card. Once signed, are trapped in the debt and it becomes extremely difficult to get out of. It is an extremely lucrative business for the financial institutions which issue these credit cards. They keep young people in credit cards sale department, who are given sale bonuses based on number of people they manage to rope in. This is how the business is done.

There are a horde of questions which are pertinent to the credit cards. Why do the credit cards carry such high interest rates, what is their justification?

This is quite a burning issue! Currently the interest rates are firming up and there is an upward trend in the interest rates. However, even when the interest rates were on the down ward trend the credit cards were not slashing their rates. What was the justification? Well for starters, there is no active consumer group in the country who would bring the issue up. The banks do have to pay the franchise fees to the franchisers such as VISA and MASTERCARD. But the point to be noted is that the same companies are offering credit cards at 12% to 14% annual interest rate internationally where in Pakistan the interest rate being charged on these cards is in the vicinity of 28 % to 33% and the hapless consumers have no voice. They simply have to keep on paying. The banks keep making the money and of course they are not going to complain. There is a need for some kind of governing group to watch this area.

Another practice of the banks is to slap charges on the monthly statements without previous agreements from the clients. Granted these amounts are small but is amalgamated in total, they do add to considerable amount. There is a large number of people who would rarely read their statements, or notice these charges, or simply throw their hands in air and say, shucks what can one do.

Banks also have a habit of providing services, the benefit of which is dubious to the customers as well as to themselves. These would include a variety of insurance and some of them are given fancy names such as "gold wallet" etc. whatever the name, all it effectively does is, to take away gold from the pocket of the consumer.

What is the over all situation? Yes the credit cards are useful and they provide a convenience. But they have to be handled with care. There is a need for consumer watch dog group to safeguard the consumer interests, as there is a common practice of overcharging of interest. There are practices which are unethical and they should be eliminated. Consumer groups should take strict notice of such things and educate the masses so that people at large are not led astray and are not caught up in a debt trap that they have to slave for generations to get out of.

There is a lot of noise one hears about Islamic Banking these days. The question of credit cards being Islamic should be argued. Is the excessive interest rate which is being charged by the credit card companies at the moment fall under the category of Riba, as the meaning of Riba both lexically and in essence is exploitation. Hopefully some personage of higher order will come forward to answer these questions, and, hopefully some consumer group will take lead to rope in the credit card companies which at present are running amok, lest the next generation is caught up in the debt trap. If not then the credit cards will be, but a bane on the society.