Adhil Shetty: Credit cards, where do they stand now?

Two decades ago very few people used credit cards and it was considered a premium product. Today, an average Indian adult juggles his credit purchases with say, around five cards and uses it in one out of every three transactions.

Banks are constantly hunting for new opportunities with
credit cards and hundreds of reward programmes, schemes, tie ups, offers et al compete for attention.

We have also seen a phase when credit cards were given away free with caution thrown to the winds in the early 2000s. A decade later things look very different. On one hand, consumers have become more aware of how to use a credit card prudently and, on the other hand, credit card companies have realised that without due diligence on a person’s credit profile, they were in danger of accumulating mass defaults incurred from the product.

This led to a number of progressive changes and stricter norms that have slowed down the industry in the past three years but a revival of sorts seems to be in order now.

Changes in credit card norms
The last two years have been a period of consolidation for the credit card issuers. The underwriting norms as well as recovery mechanisms of cards have been tightened. Greater reliance on Cibil reports, reducing cash withdrawal limits, reducing credit periods and increasing penal fees are some of the steps taken by the banks to limit defaults. Banks also began to focus on targeting high networth customers. The new credit card rules also make it mandatory for the lenders to notify consumers at least 45 days prior to an interest rate hike.

Security features
Many significant upgrades in credit card security have been initiated recently. The introduction of second level authentication for IVR transactions and online transactions are significant in addressing security concerns over phone and internet. EMV chip stores the data in swiping machines in a highly secure encrypted format, thereby reducing the chances for extraction and cloning of cards.

Product variants

Premium cards or classic cards
Premium category cards are credit cards with higher credit limits and several incentive programmes, targeting high-end customers. Gold, platinum, silver and classic cards come under this category. The benefits a premium cardholder enjoys include loyalty points, discounts, higher insurance covers, concierge services and access to exclusive airport lounges. Premium cards can have higher fee and usually require higher income and credit score.
International cards or travel cards

Banks and card companies have explored a new segment of travel cards or international cards for frequent fliers. The customer can use it all over the world. One can spend on them in foreign currency and settle the dues in local currency. Credit limit will be based on the basic travel quota (BTQ) entitled. Preloaded cards are also available for overseas transactions. By pre-loaded the card with the currency of the country the traveller is visiting, he will be protected against fluctuations in foreign exchange rates.

Credit-cum-debit cards
IDBI Bank has recently introduced ‘Magic Card’- a debit card with a credit limit set to it. It gives you excess credit when there is no money in your savings account. This card works well with a salary account in IDBI Bank as they come with an overdraft of 2 to 3 times of your salary without any processing fee. Like any other card, Magic Card too has loyalty points for shopping, additional insurance in case of loss or theft and exclusive discounts at various merchant establishments.

Co-branded cards
Banks tie up with other organisations to provide focussed benefits. Suppose, if you prefer shopping from a particular outlet or dine frequently at a restaurant, your specialised credit card will help you earn while you spend through bonus points and discounts. While restaurants, retail outlets and petrol pumps offer discounts to loyalty cardholders, airlines compete to attract the customers through frequent flyer cards with which mileage points can be exchanged for free flights apart from in-flight privileges including going higher up the priority list on awaited confirmation, increased check-in baggage allowance and priority for confirmation on waiting list.

Co-branded cards are available in many sectors such as travel, retail, fuel recharge, telecom, retail outlets, restaurants etc.
Innovations are endless in terms of creating conveniences for customers. For instance, one of the co-branded credit cards of Axis Bank has a tie up with LIC India. You can pay your LIC premiums on time through this card and earn brownie points. Of course, there are perks for swiping the card for your shopping too. In addition to regular credit card benefits, it has a global acceptance, fuel surcharge waiver and lost card liability insurance cover.

Secured cards
Secured cards are cards offered against your fixed deposits (FD) with the bank. They come with a credit limit of 80-90% of the fixed deposit as your FD will provide security for the credit card. Credit card against FD is a win-win situation for both the bank and the customer. For the bank, the loan amount is secured against default while the customer will also have a chance to improve his credit rating.

Interest rates
Though the interest rate trend of credit cards is downward, the movement is slow. The annual percentage rate (APR) of cards are different for cash advances, purchases and balance transfers. Card holders should be aware of how long an introductory rate lasts, and also, when and how much the rate will adjust, because a single late payment can cost a lot.

The writer is CEO of BankBazaar.com, an online marketplace for personal, home and car loans.