Credit Cards – the Good, the Bad and the Ugly
Credit cards are very good for me. Card issuers think that I would be good for them, too, and they keep offering me credit cards which I refuse—I have three already, and that is quite enough, thank you.
 
Actually, I am a bad, no, useless actually, credit card customer. This is because I never borrow on a credit card. Each of my cards has a ‘100% payment on due date’ arrangement in place. That makes me a 'transactor' and not a 'revolver' (nothing lethal, relax—I will explain soon).
 
Transactors like me use their cards for almost anything they buy, in a shop, online, or even to buy a loaf of bread from French Loaf. This is not because they are ardent followers of Modi-ji and fervently believe in Digital India. It is because buying on a card, instead of paying cash, does not cost anything extra. On the contrary, there are two tiny benefits—credit for up to 45 days (you pay only when the monthly bill becomes due), and the accumulation of points, with which you can (eventually) buy some useful, or useless, thing.
 
The card issuer usually loses money on customers like me, because all it gets is a small interchange fee (about 0.5% or thereabouts) on every transaction, but has to pay the shop, or vendor, upfront and, hence, bear the interest cost on the money until I settle my bill.
 
But card issuers tolerate useless customers like me because they milk the revolvers (a poor analogy, but true).
 
A ‘revolver’ is a credit card-holder who does not pay the full monthly bill. He pays only 10% of it. The rest of the bill amount ’revolves’ (gets carried forward), on which the card issuer charges him a hefty interest, 2.5%-3% per month, i.e., 30%-36% a year. The best customer for a credit card company is the permanent revolver, one who keeps paying 10% of the bill every month and does not bother about the usurious interest rate.
 
Typically, if 60% of the customers are revolvers and 40% are transactors, the card company is doing OK. If the ratio is 75/25, it is doing very well, thank you. But hold on—90/10 means dark clouds are looming, and 100/0 means bankruptcy. A high revolving rate can get to be too much of a good thing!
 
Ok, so much for the ‘good’. 
 
Next – the ‘bad’.
 
For the customer, ‘bad’ is when he defaults on the card payments. He starts getting calls, first in a polite voice, then in harsher and harsher tones; finally, a tough-looking guy lands up at his office or doorstep and starts yelling for payment, so that everyone around can hear and he is shamed into paying. That is when he faces a mountain (all right—a hillock) of debt, including all kinds of penal interest and default fees, which boost the amount he has to pay.
 
For the card company, ‘bad’ = excessive delinquency. Let me explain a little bit.
 
A card issuer has a large fixed costs on: a sophisticated computer system, a 24x7 call centre, sales people, debt collectors, advertising and marketing. It starts making money only when it has:
- a substantial card base, 1 million plus;
- a revolver rate of 60% or so; and
- bad debts (delinquency) of not more than 5%-6%.
 
The key number is the delinquency. Credit card issuers tolerate, actually like, a ‘reasonable’ amount of bad debts because it shows that the risk level is optimum, i.e., high enough to show that they are attracting customers, who are always tight for money, so that they will keep revolving and paying interest, but low enough to maintain profitability. 
 
But if delinquency shoots up to 10%+, all the profits will disappear. Any higher, and the card issuer will be in loss and there will be ‘alarm and despondency’ in the management.
 
Now—the ugly.
 
Credit card is a business in which there are a few ways to make money—interest, annual fees, interchange, late fees and foreign exchange. But there are many ways to lose money. That is what makes this an ugly business, for both issuer and customer.
 
The biggest issue is fraud. Over several decades, issuers have been installing newer and more sophisticated fraud prevention systems; but, whatever they do, the fraudsters seem to be able to catch up very quickly. Online shopping with credit cards seems to have opened up new possibilities of stealing money from credit cards. Sometimes, the card issuer takes the hit; at other times, the processing or paying bank (called the acquirer) bears the loss.
 
This can get ugly for the customer, too. My wife did not hear several pings on her mobile phone in the early hours of the morning. Then came a phone call from the issuing bank “Have you done such-&-such transactions?” It turned out that several fraud transactions had been done on her card in quick succession (hence, the pings – SMS from the issuer) until the fraud detection system detected that something was amiss and had blocked the card. Over Rs50,000 were missing.
 
I went to the police station to lodge a report. The first thing they asked was “Was it a credit card or a debit card?” When I said it was a credit card, the cops lost interest – it seems they were only worried about debit card frauds. It took me more than two months, after endless emails and conversations, to get the money back from the issuer.
 
The credit card business also turns ugly for issuers when other forms of fraud happen. Two major ones are: hackers entering the system and stealing credit card data and sales people colluding with customers to forge bank statements and ID cards to get approval for a new card. Sales peoples usually worry about their targets and incentives, not future bad debts.
 
But whatever be its complexion—good, bad or ugly—the credit card is here to stay and it is up to everyone involved to save their skin while reaping its benefits.
 
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)
Comments
tillan2k
11 months ago
Credit card companies like Old Pathan who say evenif defaulter dies an dgoes into grave we will recover theamount . wonder why sensible are lured and tempted in to trench
benu9714
Replied to tillan2k comment 11 months ago
AMITABHA BANERJEE : I think people borrow on credit cards for three reasons : 1. Easily available credit for possessing whatever you want, right now. 2. A belief that there will be no problem in paying in 'easy instalments'. 3. No other way to get hold of some money.

Do credit card issuers actually "lure" people into borrowing? I think this is too harsh an accusation. Yes, they do present a temptation, but so do many others - race courses, liquor shops, casinos, to name a few.

Of course card issuers try everything they can to recover their dues. Do you know any money-lender who does not?
Premkumar R
11 months ago
Good article. I have been using a card for 15 years without any annual charges. For the first 7 to 8 years, I have been a customer like you but since then I make use of occasional EMIs also. For the last 7 years, i also have a second card. If you use wisely, credit card is very useful and I have been using them for almost all my shopping needs. In the last one year, I have been using Google Pay, Phone Pay, etc. for some of my shopping needs. As has been pointed out here, when there are failure in transactions which I authorise, the money is very efficiently refunded in the case of the cards as well as for the other modes I mentioned.
benu9714
Replied to Premkumar R comment 11 months ago
Amitabha Banerjee : Yes Mr Premkumar, for you a credit card is "good".
benu9714
11 months ago
Amitabha Banerjee: Yes, the card issuer does get a share of 0.75%-1.1% out of the Merchant Discount of 1.5-2%. But this may not cover all its costs, viz.:
- The Issuer settles within a few days of the purchase, but you pay on the bill payment date, between 15-45 days from the purchase date., average 30 days free credit to you. During these 30 days the Issuer is out of pocket. Its cost of funds is about 0.67%, assuming its funds cost 8%.
- The Issuer pays for Reward points (about 0.6%) and freebies such as access to airport lounges.
- The Issuer has large overheads - 24/7 call center, computer running cost, advertising and marketing expenses, administration etc.
Net net, the Issuer hardly makes any money on a Transactor, maybe even a loss.
Regards.
narenkrishnan
11 months ago
"card issuer usually loses money on customers like me" -- not true as the 2% collected from the merchant as Merchant Discount Rate, or MDR is split between merchant's Bank, visa/master card and card issuing bank
adityag
11 months ago

Good write up. This would be an ideal Credit Card 101 primer. You can write many more on credit cards. I'm curious to know your views on Rupay (as opposed to MC and Visa).

90% of the rewards and perks are worthless (maybe you can give away as gift in a party or whatever, but it's useless). Air miles is the only worthwhile reward if you're a high value customer. If you're a transactor, charge cards are the best if you don't mind the hefty annual fees.

PS: Do you play bridge on BBO?
benu9714
Replied to adityag comment 11 months ago
Yes, reward points are mostly useless and card issuers provide for only 50-60% of the liability of paying out rewards because many people never use them.
You can make a normal credit card into a de-facto charge card by paying 100% every month. Rewards are better on charge cards, but the annual fees are, as you said, hefty.
Yes, I play bridge on BBO, a lot !! My ID is goforit51.
vkjain1973
11 months ago
Good article Banerjee sir. But mentioning India as a second class country is in bad taste (in introductory part about the author).
benu9714
Replied to vkjain1973 comment 11 months ago
Back in 1976 it was!!
bhaskar.jain
11 months ago
Some more advantages are 1) Reward points which for some cards can be 1RP=Rs 1 and can be used for travel airline and hotel bookings. 2) Upfront "instant discount" on shopping during Diwali sale etc on Amazon/Flipkart.
AJ_AJ
11 months ago
A HUGE advantage of credit cards that you have missed out is that ability to reverse a transaction. If reported within 1-2 days, credit card companies will reverse transactions even if it was just an accidental charge.
benu9714
Replied to AJ_AJ comment 11 months ago
Amitabha here.
Yes, true. You can ask for a refund if it was a transaction not done by you. But, if it was an error, I don't think you will get a refund. If you have yourself authorised a transaction (by keying in your PIN on a POS machine or entering the OTP in an online purchase) you will be told "once a sale, always a sale".
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