Capping credit card charges

Are unrestrained credit card charges good for the credit card industry? Is the current rate of 42 to 45 percent per annum credit card charges not enough to satisfy credit card issuers’ profitability objective? Are these charges not high enough to stop card users from swiping their cards for expenditures beyond their means to pay? Is setting cap for these credit card charges the answer to lighten the load of heavily indebted consumers?

The above questions, and many more, are being raised in the debate between those in favor and against the soundness of setting a cap on what credit card companies can charge their delinquent customers.

Let’s get this straight. Anyway you view it, whenever one uses a credit card, a loan is made to the bank or financial institution that issued the credit card. Well and good if the debt is paid back in full when the billing statement is delivered. The problem starts when credit card payables start to pile up.

Today, too many Filipinos own credit cards not because it is a convenient and safe alternative to carrying cash, but because it gives them access to easy loans, and subsequently, self-imposed installment payments on their credit card dues.

It’s no big secret also that with this convenient access to loans, many credit card holders are easily tempted to use their plastic cards for unproductive purchases and entertainment expenses, often not included in the budget, to be paid from the regular salary pay checks.

Minimum payment rut

And when there is very little left over from the take-home envelope, users start to avail of the “minimum payment” that the credit card company offers as an alternative if the full amount cannot be paid. Chances are, the card holder will stay in this “minimum payment” rut for some time.

The danger of getting into the “minimum payment” cycle is the illusion of having so much available credit and, more importantly, overlooking the fact that the finance charge (or interest rate) in your billing statement is getting out of hand.

To an average credit card holder who has maxed out his P70,000 credit limit, for example, the minimum amount that the bank asks will be in the vicinity of P5,000. Often not realized, about half of this will simply pay for interest rates.

Worse, if the user will just continue paying for the minimum required payment month after month, even if he no longer swipes the card, he will continue being in debt with the credit card company for about a quarter of a century. No kidding!

Only the banks and credit card companies are happy

Credit card firms will argue that this is the cost of unsecured lending, of having a high risk borrower who has reached and even breached the maximum limit of his ability to pay. Apparently, the credit card companies do not mind being liberal in issuing cards even to high risk borrowers since they get their income from the high charges being imposed on these high risk card users.

We’re not even talking about other charges that the credit card firms slap on errant users, usually those who are unable to pay on time or are habitual delinquents. On top of all these, there is also the annual fee being charged on card holders.

Considering that banks borrow at interest rates that are at its lowest to date or pay a miniscule practically-zero interest rate on the money that you and I put aside in our savings accounts, the resulting bottom line for the banks is not bad.

Unproductive credit

No wonder then that credit card companies and their banks are against putting a cap on interest rates. Those arguing for the setting up of cap on charges claim that credit card companies have been indiscriminate in approving card issuance eyeing the high charges to be realized if many of these card users will be delinquent or will default.

By putting a cap on these credit card charges, it is expected that banks and credit card companies would be more prudent in issuing cards. The freed loanable funds would then be channeled to more productive uses like micro and small businesses which would ultimately spur a healthier economy.

As it is now, there is too much loose and easy credit being made available for unproductive spending through the use of easily issued credit cards.

Informal usury alive

Credit card companies have warned of a resurgence of usurious rates by informal lenders if the proposed interest rate cap is imposed. As if banks charging 42 percent a year is not! But then again, those neighborhood money lenders charging 20 percent on month have not really been removed.

Market vendors, small shop fabricators, sub-contractors, piece-meal operators, sari-sari store owners are just some of the small businesses that rely on these usurious lenders for their capital needs precisely because credit card companies and banks are not there for them.

Perhaps if we have less money being channeled to credit card loans, bank would give a second look at how small businessmen could borrow money from them. And if putting a cap on credit card interest rates is one way of prodding banks to look for other sources of income, then so be it.

Central bank’s role

And what does the Bangko Sentral ng Pilipinas say about the proposed cap on credit card interest rates and charges that is currently being deliberated in the Lower House? Not much.

In its position paper presented before the House’s banks and financial intermediaries committee, the central bank said they are unable to impose any regulation that would put a cap on interest rates on credit card debts and other charges on credit card use.

Reading between the lines, what the BSP simply says is that they would rather not meddle with stuff that could affect banks and financial institutions’ bottom line. Let market forces take care of its self, the regulator added.

Simply put, if limits to interest rates on credit card debt were to be imposed, Congress would have to do its job of passing a law. Therefore, if the BSP were to be mandated to impose the cap, it would have no other recourse but to comply.

After removing all the mumbo jumbo of banks on the issue, if the way for an even more responsible system of credit card use and possibly opening new channels of lending for those who really need money for productive endeavors is capping interest rates, then let’s do it. –Rey Gamboa (The Philippine Star)

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.