Hooked on Credit Cards

The other day I received one of those 'if you don't pay, we will take you to court and by the way your card is now cancelled' letter from a local bank. What I did not realise was that a credit card, which I signed up more than a year ago with the bank because the MD practically shoved the application form under my nose when I was their guest of honour for launching one of their products, had an annual fee due. All this while, I have never bothered much with the monthly statements as I never used the card but apparently about 2 months ago, the annual $100 fee was due. I didn't pay that until the subsequent month when a late fee and some other charges were also imposed. Anyway since it is still my fault, I paid all that but despite that the letter came. I thought that was very prompt of their credit control system and if all banks had this kind of control, there would be less people in debt.

A couple of days ago, another local bank gave me their platinum card which was recently launched, all I had to do was sign the form and the card will be activated. I read the brochure - all full of interesting stuffs like ability to play golf anywhere in the world etc. At first I thought, wow! Free card. But then I realised, it's not free money. There is a cost to this. For instance there was the $280 annual fee plus other usual credit card interest charges.

Historically credit cards started off as merchant credit schemes and first used around 1920s in the USA to sell petrol. In the 1930s, companies started accepting each other's cards and by 1950 the first Diners Club card was introduced followed by the American Express. Visa came in 1958 originally issued by Bank of America as the BankAmericancard and Mastercard came in 1966. Economically, some economists have stated that credit card use increases the "velocity" of money in an economy thus resulting in higher spending which led to higher GDP (which of course conveniently forgets about the higher credits and debts).

Many Bruneians carry them and I heard that in the past many students come back from their overseas studies carrying debts on their credit cards issued abroad. Nowadays both local and overseas students are not spared. Many people now carry credit cards as they are now easily available in Brunei and some cards are easier to get depending on which banks issued them. Many merchants in Brunei now accept them and even government departments now allow for credit cards to be used to pay for the utility bills. With the recent ruling on loan caps, a number of consumers turn to credit cards to finance their purchases including their daily needs.

Most importantly a lot of credit card users do not realise the amount of real rates which they pay for their credit cards. Even a simple $1,000 credit, if one was to pay only the minimum $50 a month and with a charge of around 2.5%, will take more than 2 years to pay off and by then the amount of interest payment would be more than a third of the original principal. Imagine if the value is higher and in the meantime the card's debts increased. With credit cards, purchases became easier. Even if it is a heavy ticket item - say a $3,000 plasma tv - a cardholder can easily justify it by thinking not in terms of $3,000 but in terms of the 5% monthly payment which is about $150 a month. Psychologically that plasma tv suddenly looked so much more affordable as the thinking is $3,000 versus $150 (never mind that $150 will be for at least 2 years plus interest). Once, used to easy credit, users find it easier to buy things on the spur and without deliberating too much. Swipe it and sign it. It's so much easier to keep up with the Joneses nowadays.

There are many other issues with credit cards. Some have argued that there should be rules on credit card limits (there is) and rules for transparency. In some countries, these existed but these still do not stop credit card users from running huge debts. Eventually it's up to the credit card users to realise and to control what they have. The most important take is that at the end of the day, credit card users have to be wary of what they have. A credit card can be such a convenience. But that innocent looking plastic card can equally ruin your life.