DEBT

   The human cost of high interest rates

By Michael Hardy  

For many young professionals, it seems so simple. A sales representative shows up at your office and hands you a credit card application. You tell him your monthly salary — say, Rs. 14,000 — and that you’ve never had a credit card before. No problem, he says, just fill out the application and send it in. A few weeks later you receive your plastic card in the mail and learn that you’ve been given a Rs. 20,000 credit limit. Perhaps you call your friends and family to celebrate this milestone. After all, isn’t being issued a credit card the reward for all your hard work?

Flash forward nine years. Although you’re now earning Rs. 38,000, the minimum monthly payment on your credit card is over Rs. 7,000. You’ve never missed a payment, yet your balance is almost Rs. 200,000. Worst of all, your interest rate has jumped from around one and a half percent per month to over three percent, which adds up to an annual interest rate of close to 40 percent. The sales representative didn’t tell you about variable interest rates. You were a bachelor when you first applied for the card, but now you have a wife and two children to support. For the first time in your life, you begin to wonder if you’ll be able to pay your bills.

A true story

This is the true story of an HSBC credit card holder, a corporate executive in his mid-thirties who asked to remain anonymous to preserve his good name. His story is shared by thousands of young executives who are beginning their careers just as credit cards are becoming widely available for the first time.

Hooked by aggressive marketing tactics, these executives apply for and often receive the coveted plastic cards, which advertising campaigns tell them are symbols of success. Unfamiliar with the high interest rates these cards carry, many of these executives quickly run up large balances.

Despite these large balances, credit card companies encourage card holders to overspend by regularly raising their credit limit. After racking up Rs. 15,000 in debt, the anonymous businessman called HSBC and asked for a higher limit.

“Without any hesitation, they increased the credit limit to Rs. 30,000,” he told The Sunday Leader. “After that, they kept increasing the credit limit without me even asking for it. At that time, I was very happy to own a credit card.”

Usually, HSBC raised the credit limit without asking if his salary had increased. All that seemed to matter was that he kept making his minimum payments. Now, he worries whether he’ll ever be able to pay what he owes.

“It will be very difficult,” he said. “The cost of living is so high, and I have to think about my daughters’ education. I would be very glad to get some relief.”

No relief from the bank

So far, no relief has come. When he called HSBC, a representative advised him to continue making the minimum payments. Right now, that’s all he can afford. He doesn’t want to stop paying his statement for fear that his financial reputation will be ruined.

“If I fight the bank, it won’t be good for my image or my career,” he said. “It’s very difficult, but I don’t want a bad name. If I knew the situation would become this bad, I never would have taken a credit card.”

In response to the businessman’s story, Sarit Wijeyekoon, Head of Personal Financial Services for HSBC, said that customers having difficulty making payments should contact the bank immediately to decide on a payment plan. When asked about HSBC’s sales tactics, Wijeyekoon said that the bank makes its best effort to educate its customers about their cards.

“We have tried to be very transparent in terms of explaining how the mechanism works,” Wijeyekoon said. “We also have a call centre that can answer any questions the customer needs to ask.”

Wijeyekoon said that the customer in question seems to be having trouble because of the economic recession, not his card payments.

“He’s had the card for nine years, and he’s only complaining about misleading sales tactics now,” Wijeyekoon said. “It makes you wonder why he didn’t complain earlier. As a bank, we have to collect on our loans, but if anyone is in financial difficulty we try to re-structure their payment plan. If we don’t have a choice, we will write off money.”

Another story

Another young executive told The Sunday Leader a similar story about her credit card, also on the condition of anonymity.  She first applied for a card two years ago, when a sales representative for Nations Trust Bank came to her office and offered an American Express card. She told the representative that she didn’t want a card with a high interest rate or numerous fees. The representative assured her that this wouldn’t be the case, so she applied and soon received her card in the mail— with a Rs. 38,000 limit, even though her salary was only Rs. 30,000.

Last year, she began having trouble making her payments. Every time she was late in paying her bill, Nations Trust slapped her with a fee. She began receiving numerous phone calls from people at the bank. 

“Nations Trust has big communications problems,” she said. “I would reach an understanding about a payment plan with one officer, but then another two or three people would call asking for money. I faxed a written request to cancel my card, but they claimed that they never received it. Sometimes they were rude, sometimes they used abusive language.”

The woman’s monthly payment is now about Rs. 1,500, including fees. Even after she pawned her jewellery to make the payments, Nations Trust has recently been threatening her with legal action. Like the businessman, she said she wouldn’t have applied for a credit card if she knew how much the interest rates and fees would be.

“My advice is not to apply for credit cards,” she said. “They are like a cancer. Most of my colleagues have taken office loans and cancelled their cards.”

Nations Trust responds

In response to written questions, a spokesperson for Nations Trust gave the following statement:

“Terms and conditions, although exhaustive, are clear and unambiguous…Customers have every right to question or seek clarification if they do not understand any part of them. Clearly, it is not acceptable for a bank to be abusive and threatening when collecting overdue debts, and such behaviour should be reported to the management of the bank and, if it continues, to the ombudsman… Interest is charged only if the customer does not settle his dues in full on or before the due date which includes an interest-free credit period up to 51 days. The bank bears the cost of providing this credit for customers who settle in full and charge those who revolve their credit at 3.4%-3.5% per month.”

Why are credit card interest rates so high? Banks blame the government and the government blames the banks.

Inflation and high taxation are partly to blame for the high rates, according to Managing Director and CEO, DFCC Vardhana Bank, L.G. Perera. Perera told The Sunday Leader that his own bank paid about 90 percent of its pre-tax profit in taxes last month, although most banks pay closer to 60 percent.

“It’s bad policy to keep taxes at such levels — it’s counter-productive,” Perera said. “The government is basically killing the banks. It might seem like the banks are making big profits on high interest rates, but they have to maintain those rates to be successful.”

The Central Bank’s view

Mrs. T.M.J.Y.P. Fernando, the acting director of the Central Bank’s Bank Supervision Department, said the government has been taking action to reduce interest rates.

“As we have lowered our policy rate we have asked the banks to lower their rates,” Fernando said. “They can’t do it immediately, but banks have reduced their rates over the past year. Of course, there is an ongoing discussion about whether corporate taxes are too high. But the government needs revenue also, no?”

Another reason for the high rates is the immaturity of the Sri Lankan credit card market. Unlike many Western countries, Sri Lanka doesn’t have a sophisticated credit-monitoring agency. With fewer ways to determine customers’ credit-worthiness, banks are forced to charge high rates to cover the risk of defaults, which are more common on credit cards than on any other type of debt.

Fortunately for credit card customers, relief may be on the way. Under pressure from the Central Bank, HSBC has agreed to lower its interest rates soon, and other banks may follow suit. With about 900,000 credit cards in circulation, 225,000 of them issued by HSBC, the lower rates will be welcome news to the many people, like the two executives profiled, who are suffering under what can seem like permanent debt.