BackCredit card abuse up, debit card users more prudent
This points at a dangerous trend as credit card debt is very expensive
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If data is to be believed, credit card users have increased cash withdrawals from automated teller machines (ATMs) in the period April 2012-January 2013 compared with the period April 2011-January 2012. According to data from Reserve Bank of India, between April 2012 and January 2013, the total number of credit cards in use went up 7.12%, whereas the number of credit card transactions at ATMs went up by 10.31%; amount involved in such transactions has gone up 19.60% in this period. Essentially, what this means is that the number of people using credit cards to withdraw cash is going up with additional number of credit cards issued.
“Though we have not seen this trend in our base, but if the numbers do say that, then it is a matter of concern as people only withdraw cash from ATM machines (using a credit card) when they have absolutely no money," says K.V.S. Manian, head (consumer banking), Kotak Mahindra Bank Ltd.
On the other hand, the total number of debit cards in the same period has gone up by 13.51%. Here again though the number of transactions through debit cards at ATMs has gone up by just 5.31%, the number of transactions at points of sale (PoS) has gone up by 40.23%. Also, the amount involved in ATMs has gone up by 16.52%, whereas at PoS it has shot up by 57.85%. “It shows a shift and it is a good sign for the banking industry," says Manian.
The amount involved per debit card transaction at PoS has gone up from 1,633 in April 2012 to 1,839 in January 2013.
How to understand...
...more credit card cash withdrawal: This is not a very good sign as credit card cash withdrawal is very expensive. Apart from a one-time withdrawal charge, which varies from bank to bank, the interest on such withdrawals are calculated from day one and there is no interest-free bill cycle available unlike with credit card transactions. “I will be worried if people are doing this as it is very expensive," says Manian.
It is possible that rising prices and stagnant income has led people to fill the void of short-term cash requirements. “One can’t ignore the fact that inflation has played a role. But this is a wrong strategy because credit card loan is one of the most expensive loans. One will put oneself in a position from where it can be difficult to get out," says Uday Dhoot, deputy chief executive officer, International Money Matters Pvt. Ltd, a financial planning firm.
So which section of people is really doing this? “Obviously, either people are ignorant of charges, which is less likely, or these are people spending more than their source of income. It is possible that these are mostly young people who think they can pay back the next month. These are people who give in to their temptations," says Dhoot.
So what should they do? For such people who are impulsive, it is very easy to get into a credit card debt trap. Since the interest is calculated from day one, the total payback may be exponential. “These people who lack a will and control should give up credit cards. This will take them back to pre-credit card days wherein one made budgets and spent money they had," says Dhoot. Another way could also be to have credit cards without cash withdrawal facility.
In the period April 2012-January 2013, the number of transactions at PoS through credit card has gone up by 25.49% and the amount has gone up by 12.25%. This again means that the ticket size of the transactions through credit cards at PoS has gone down. In real terms, the per transaction amount has gone down to 3,070 in January 2013 from 3,431 in April 2012.
...rising use of debit cards at PoS: Earlier ATM cards could not be used as debit cards. But now they double up as debit cards. In fact, the central bank and even other banks encourage people to do PoS transactions. There have been various advertisements to make people aware. “PoS transactions give revenue to banks," says Manian.
It is a good trend as it also reduces the risk of losing cash due to unforeseen events. Also, if cards are used for transactions, then the PoS will also have to declare the full amount of transactions and profit, thus aiding tax collection.
So what are the reasons that back this trend? “Now banks issue add-on cards. So what is happening is that the segment, such as youngsters and housewives, who earlier used cash for almost all purchases now use debit cards. This may be one of the reasons," says B. Srinivasan, a Bangalore-based financial planner.
He also points out that now even people with low salary get a debit card linked to bank accounts in which their salaries are credited, unlike earlier when they were forced to withdraw cash through ATM or withdrawal slips. “People with very low income are usually indifferent to using a debit or credit card, but the strata of society having low income is now included in the process and this is a great achievement," adds Srinivasan.
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