Dealing with credit card mess

By Jackson Okoth

Herman Oduor is a middle aged man working for a logistics firm in Nairobi. When he got an offer to sign up for a credit card from an aggressive sales person sent by a bank, Oduor took up the plastic cash with an agreement that the bank could recover the card debt in full from his salary account at the end of each month.

The arrangement meant that Oduor could plan all his monthly expenses and then leave a balance in his account for the bank, just enough to clear the card debt. All went well for several months until the bank decided to change the contract so that it could only recover 50 per cent from his account, leaving the balance to be settled by a direct cash payment at the bank’s card centre.

When Oduor begun to fall back on the cash repayments, the bank stopped the card and passed on the card to its debt recovery item. Oduor was forced to take up a loan from another bank to clear this debt, escaping the embarrassment and strain of being blacklisted by a credit reference bureau.

Odour’s experience with credit cards is on the list of numerous individuals struggling to pay off their debts after engaging in a careless spending spree.

SMS alert

“The mistake that most people make is thinking that a credit card is free cash that is used and never repaid. Most consumers take the plastic card while not in possession of the necessary discipline required. This is the reason they soon run into debt,” said Kariuki Ngari, Executive Director, Consumer Banking at Standard Chartered Bank East Africa.

Credit card debt is something that can get out of control quickly if left unmanaged. In order to prevent a financial disaster, there are several ways to make sure the balance, interest, and fees are kept under control.

The options to manage the bills vary according to each individual situation including credit worthiness. To keep from getting into trouble, it is important to stay on top of them each month.

“We usually encourage card users to make their payments in full at the end of the 30 days credit period. This is because part payments and the roll-over of a month’s debt into the next month attract interest penalties. Most clients go into trouble when these interest payments accumulate,” said Ngari.

Kenya’s plastic card market has both cards based running on a magnetic strip as well as chip-based ones. For instance, the Standard Charted Bank Platinum card, introduced in the market more than a year ago, uses chip technology. With the world moving into chip technology platforms, Kenya has little option but to move towards this direction.

“The chip based platinum credit card is difficult to clone and has extra security features, including an SMS alert to the card holder each time the card is used in a transaction, two seconds after it has been executed. This assists the bank to cover for losses in the event of unauthorised use of the card,” said Ngari.

The SMS alert also helps the cardholder to keep a tab on the transactions done on the card and therefore manage the debt. Cardholders are advised that it is often wise for one to keep the credit card in the pocket or wallet always. This is to safeguard it from getting into unauthorised hands. The card’s PIN number should also be kept a secret that should not be revealed to anyone.

“It is also a risky affair to send someone else to use a debit or credit card on an ATM as this implies that they also share the card’s PIN number,” said Ngari.

The type of financing provided through cards is revolving credit. This means the monthly balance is used to calculate the interest and fees. The company should provide the date that the interest is calculated. In some cases, it is based on that dates balance. Others base the interest on the average daily balance. In either case, the interest is added to the balance and included in the next month’s calculations.

“Paying the entire balance is the best option. However, there are banks that would want to earn interest from penalties put on late repayments. But this is not fair at all on the card holder,” said Ngari.

With a zero balance each month, the interest should be little to none. There may be fees accrued if the balance goes over the limit at any point. If the total is paid by the due date, the bill is not a threat towards finances should a job loss occur. This option is not always available, depending on personal situations.

Managing credit card debt comes in many different forms. The options available to each person are dependent on his or her own financial situation. By managing the financial situation, it is easier to find a way out of debt and into financial freedom. A credit card facility is usually offered to all those individuals on a salary or regular income.

For instance, a customer who qualifies for a Standard Chartered platinum credit card must have a basic salary of Sh50,000 for the Gold Card whose maximum credit limit is Sh1 million while for a platinum credit card, the minimum is Sh600,000 and the maximum credit limit is Sh2 million.

An increase in the number of plastic cards available in the market is happening when cheques are slowly moving out of circulation and could soon be obsolete.

But space is growing for new payment systems especially plastic cards and mobile money.

Also being phased out gradually is the use of cash.

“The reason commercial banks are still investing in heavy security doors, safes, bullet proof glass and manned security guards is because of the need by banks to deal in huge volumes of cash,” said Ngari.

In the near future, it will not be unusual for one individual to have over 10 cards in the wallet, issued by fuel stations, supermarkets, restaurants and other retail outlets.