WILD COOT: Credit card interest

BY HARRY RUSSELL

THERE IS NO DOUBT that we are all concerned about the interest being charged on credit cards, especially recently. To my horror some banks are charging 26.99 per cent. Usury? Can it be justified?

The banks offer customers the service of credit cards and for that they should be paid a fee and interest. Credit starts when the customer buys a shirt or a dress from a merchant, pays with the credit card and goes home. The merchant takes his chit after a few days or the same day, deposits it with the bank and seeks immediate credit.

The bank pays him the total of the chit, let us say $100, and it is the second of the month when he deposited. The bank then debits the credit card customer $100.

The bank sends a statement to the customer on the 20th of the month saying that his balance is $100 and that he must pay a minimum of $10 so as to keep his credit card current. The customer pays $10 towards his account leaving a balance of $90.

It is only fair for the bank to charge interest on the $100 from the time it pays the merchant until the $10 payment has been received and on the balance of $90 thereafter; and if the $10 minimum payment is not received on the $100 from the date of payment to the merchant to the date of the statement.

What banks are doing is charging interest on the purchase amount ($100) from the date of the transaction and not necessarily the date that the chit is presented. Is that fair? Well! An argument is that the bank is committed when it "okays" the transaction.

The customer benefits if he pays the full $100 as soon as he gets his bill. Then no interest is charged.

But banks are not all that altruistic; merchants are charged commission of 3.5 per cent to five per cent for the service. Some of this charge goes to the credit card company (Visa, American Express) whose name is being used on the credit card and some goes to the actual bank.

The question is, can the banks justify the exorbitant charges in interest. United States' President Barack Obama does not think so, and therefore he placed a ceiling on charges which a bank can impose. Should we do the same?

Credit card customers are for the most part high risk. Once the credit is made the customer can take to flight and the bank is left holding the bag, or figuratively speaking the shirt or the dress. Many credit card customers are given a $2 000 limit and an eventual bad debt of $2 000 may not justify the cost of pursuit.

Therefore write-offs and investigating disputes with the merchants are frequent. Many credit card customers do not enjoy other services of the bank such as current account, savings account or mortgage and thus can be flighty.

For example, a credit card holder with a limit of $5 000 and a small savings account can utilise the full limit, clean out the small savings, take Caribbean Airways or American and migrate to somewhere in the cactus of Arizona, never to be seen again.

Thus the banks justify the risks of credit cards and the attendant charges. But President Obama does not think that they are right and so do I. Here in Barbados a bank should not be allowed to raise the interest rate to 26.99 per cent because the minimum payment has not been made for one month, and to retain that charge for future transactions.

Perhaps that is what our Junior Minister of Finance was alluding to when he told us to be "vigilant for".

Banks will continue to be vicious in their interest charges unless the Government steps in. Today we do not only want the Government to raise the level of licence fees to $100 000 so as to reap some of the sweetness and counter the banks' non-extension of credit, but to take care of the man in the street whose pockets are being depleted by these iniquitous charges.

You know, the computer has been described by some religious organisations as an instrument of the devil.

Do you see the connection?

* Any comments may be directed to Harry Russell at quijote70@gmail.com.