The Credit Card Dragnet


In Economics, by ‘money’, we mean anything that is accepted for clearing a debt. To illustrate, if we go to a bookshop and buy a book, priced at $15, the moment the deal is struck and the shopkeeper hands over the book to us, we become indebted to him and this debt can be cleared by handing him anything, ranging from grains, secondhand books, etc. to currency notes. We can also discharge this debt by transferring $15 from our bank deposit through cheque. Please note that cheque is not money but only an instrument to transfer a particular sum from our bank deposit, which is money. In case our bank deposit is nil or insufficient, the cheque becomes meaningless and is dishonoured.

Traditionally, a person’s capacity to spend has been circumscribed by the cash with him, his total deposits in banks and his movable and immovable property. He can borrow against his term deposits in banks and his property. Normally, he cannot borrow against his property more than its market value. Obviously, his ability to buy goods and services is limited. Moreover, a sane person always tries to save money for future exigencies and other needs like old age, ceremonies, education of children and so on. Thus his capacity to spend has been generally restricted. No creditor has normally dared to lend him more than his present worth and against his future earnings.

This limit to his capacity to borrow and spend has disappeared once the credit card, popularly known as plastic money, has come into existence. He can now go on shopping till he becomes tired and falls to the ground. To translate a Sanskrit saying, "one can now borrow and drink refined butter!" This has given a great boost to the phenomenon of consumerism when, with the beginning of the ongoing globalization, credit cards has become internationally acceptable.

Even though the credit card came into existence in the 1950s, its concept was visualized by Edward Bellamy, a leading American novelist of the second half of the 19th century. Bellamy was a Marxian socialist. As early as 1887, he published his novel Looking Backward. Its hero, Julian West, goes into a deep slumber in Boston towards the end of the 19th century and gets up in the year 2000. He finds that he is still in Boston but everything else has changed beyond recognition. The world has changed and become completely stranger to him. He is naturally bewildered. Fortunately, he gets a guide in Doctor Leete who explains that socialism of Marxian conception has come to prevail. One of its facets is that people do not have to carry cash for making purchases. Instead, they carry a card which is widely accepted. Thus Bellamy visualizes the advent of credit (more appropriately, modern day debit) card in chapters 9-11, 13 and 25-26.

During the 1930s and 1940s, a rectangular metal plate (2½×1¼), bearing holder’s name and his place of residence, was generally issued by merchants with a large number of branches to their regular customers whose credit worthiness was beyond doubt. They were billed at regular intervals.

The credit card in the present form was introduced in 1950 by Ralph Schneider and Frank X McNamara, the founders of Diners Club. This was followed by the Bank of America’s card in 1958, which, in the course of time, came to be known as Visa card. This became acceptable in America and a number of countries abroad. In 1966, Master Card came into existence when a host of banks joined hands and established MasterCharge. It received a big boost when the Citibank merged its own Everything Card with it. Later on, other banks came with their own cards.

Every credit card holder has his PIN or Personal Identification Number whose genuineness is verified by the shopkeeper and the cardholder is then allowed to shop with no cash in his wallet, and on the basis of income likely to accrue to him in future. The shopkeeper, too, gains by increasing his sale. The company that has issued the card guarantees the payment to the shopkeeper and recovers it from the cardholder after a fixed period of time. In case the cardholder is unable to repay the debt, the company charges interest usually at very high rates. In some countries, coercion including muscle power is also used by the company to recover its dues.

Since a cardholder is allowed teleshopping, there are instances of his PIN being stolen and misused. There are organized criminal gangs, specializing in this business. Three years ago, The Guardian (November 8, 2005) wrote: ‘Credit-card fraudsters are increasingly turning to the internet now that the "chip and pin" system has closed other money-making avenues, new figures show.

‘"card-not-present" fraud—in which criminals get hold of people’s credit and debit card details and use them to buy goods online, over the phone or by mail order—has grown by 29% in a year… Online banking fraud has also risen sharply.’

The 2006 documentary film, "Mixed Out: Hard Times, Easy Credit and The Era of Predatory Lenders" vividly depicts the various unsavoury aspects of credit cards. A credit card is used as an ATM card too and this has induced criminals to steal it along with the pass word and withdraw money from holder’s account. Moreover, the credit card companies fleece holders by way of hidden costs and terms and conditions not being made explicit at the time of issuing cards.

With the onset of the worldwide recession, both the cardholders and credit-card companies are in trouble. With growing incidence of unemployment, the demand for cards has slumped and the arrears of bills of credit-card companies have been accumulating. In India, as a result, a prominent bank like the ICICI is in great trouble. Now credit- card companies are realizing their folly of issuing cards without properly evaluating the creditworthiness of the clients. In fact, till 2007, companies used to lure prospective clients by hook or by crook and give them cards. A large number of cardholders have simply disappeared without clearing their dues. Since they have lost jobs and vacated their rented apartments with no permanent address. It is extremely difficult to trace them out.

The situation in America is extremely bad. Out of the total population of 300 million, the number of cardholders is 70 million, i.e., roughly one-fourth. It is reported that, initially, card-issuing companies indulged in extortion by charging high rates and resorting to complex terms and conditions, which very few customers could comprehend. As The Christian Science Monitor (December 18, 2008) has reported, more than fifty per cent of the college-going students in the USA has four or more credit cards per head. In the present era of recession, they find it extremely difficult to clear off their dues to card-companies.

The Americans owe more than $1 trillion by way of arrears to card- companies. The growing pressure from the Federal Reserve has forced them to apply tough measures to recover the arrears and they have adopted strict norms for the issuance of cards. To quote a report by Bloomberg.com (Dec. 18), "Credit-card companies, facing an increase in defaults and a decline in consumer spending, and raising some rates, adding fees and cutting credit lines as the Federal Reserve makes the most sweeping changes to the industry in 30 years." On the other hand, existing cardholders have begun reducing their purchases. Consequently, there is a continuous decline in the volume of effective demand, adding fuel to the fire of recession. It is feared that during next one and a half years, there may be a decline to the tune of $2 trillion only due to strictness as regards credit cards.

It is needless to add that consumerism, banking, credit proliferation, etc. will be adversely affected.

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