Credit card customers, it’s time to rejoice! Or is it' At a time when loan issuers have started to winch up interest rates, credit card issuers are mulling the unthinkable: they are preparing to take the first stab at slashing their interest rates that have hovered at usurious levels of around 24 to 36 per cent a year.
Standard Chartered has kicked off the rate-cut initiative with the launch of its Manhattan card which promises to charge an interest of as low as 1.49 per cent on monthly outstandings (around 18 per cent annualised) and as high as 2.49 per cent, depending on the customers payback performance.
The Manhattan card — which has been plucked out of StanChart's global portfolio — could ignite a forest fire of rate cuts in the credit card industry if it catches on. But for now, credit card issuers are waiting on the sidelines to see if StanChart’s initiative jump-starts the fortunes of the industry that has been facing stiff competition from debit cards issued by a slew of banks.
What’s the deal'
StanChart’s Manhattan card looks like a pathbreaker. For starters, the interest rate spread (1.49 to 2.49) is sharply lower than the 2.95 per cent prevailing rate of interest on its other cards. Second, it undercuts the lowest 2.5 per cent rate offered in the industry so far.
The icing on the cake is that the card comes free for lifetime, which means that the cardholder is not required to pay any annual fees, which range between Rs 250 and Rs 2,000.
Many foresee, or rather hope, that StanChart’s move will trigger an interest rate war in the credit card industry which set its face against rate cuts when interest rates plumbed new depths in recent years. High delinquency and risk assessment have been the main reasons for the extremely steep interest rates charged by the credit card issuers.
Under the Manhattan scheme, the customer becomes eligible for the card if he has a minimum annual income of Rs 1,50,000. The credit limit for each customer will be based on his credit assessment. The cardholder starts paying interest at 1.99 per cent. Based on his usage and behaviour scores in the initial six months, the bank will decide on whether to charge a higher, lower or the same interest rate.
Is there a catch'
One of the biggest problems in the credit card industry is its lack of transparency. And StanChart doesn't seem to have done anything to lift the veil of secrecy and tell customers exactly what they need to do to qualify for a lower rate of interest. Credit card issuers prefer to retain discretionary powers when deciding on such issues, leaving customers with no clue about how the system really works.
Ask the uncomfortable questions and you can hear a great deal of waffle. Standard Chartered Bank specifies that the lowest interest rate of 1.49 per cent will be available to ‘exclusive’ customers. But it fails to outline the litmus test that customers need to pass to earn the badge of ‘exclusivity’.
All that StanChart officials are willing to say is that two factors — usage and behaviour — will determine the rate of interest you will be charged after the first six months. That is absolutely at the discretion of the bank.
There is, however, one way that a cardholder can lock into the lowest rate of 1.49 per cent: he will have to pay a fee of Rs 399 to lock in that rate for a period of six months. All other conditions relating to regularity of payments will apply. But to become an 'exclusive' customer without paying the extra fee, you will just have to pay your bills regularly and hope for the best.
Get the best deal
To begin with, not all credit cards are alike. So it pays to shop for the terms that you need in interest rate, functions, and benefits. Additionally, credit card companies themselves calculate charges and apply benefits in different ways. One needs to read the fine print to determine how a card works.
Find a card that fits your purpose. If you plan to pay the entire balance every month, then bonuses are more important than the interest rate. But, if you tend to carry a balance, you will need a low interest rate. Maybe you want a card that lets you pile up purchase points or frequent flyer miles.
Another consideration is that bonuses may have drawbacks as well as perks. Flyer mile cards and auto discount cards are not in business to lose money. They may have higher interest rates, enrolment fees, limiting features, or benefits that come only after a selected plateau. Bonuses are not the only area where you need to check the fine print. Sometimes that “low interest rate” is an introductory offer only. In other cases if you are late on your payment, low rates disappear for future purchases.
The bottom line is you need to know the terms before agreeing to accept a credit card.