Lenders Yet To Reward Good Credit Behaviour: Can We Break The Logjam?

Over the past several years of my professional life, I have taken a couple of housing loans, a couple of auto loans and held different credit cards at different points in my career. Even now, I do have a housing loan and two credit cards as open accounts.

But I have NEVER delayed payments on any loan or credit cards dues – NEVER EVER over the past 30 years. And I have a CIBIL score of 840+, which by any standard, is an excellent score.

So if you go by the text book or manual of credit risk and underwriting, I would probably be up high on the check list as a customer whom any lender would like to have in its portfolio.

Last week, I got my monthly credit card statement and as I gave it my usual look over, a message from the bank caught my eye and it said, “The interest rate on your credit card has been revised from September 1, 2014; for more details, see the website of the bank.”

Given my impeccable payment history, high score and generally good credit behaviour, and being a big advocate of using credit history and scores to price loans and credit differentially (given my connection with the credit bureau industry), I was delighted at the possibility of the rate on my card coming down – not because I roll my credit (I never do that and never will), but more due to the fact that I had played a role in introducing an industry and concept in India and it was finally being used by the lenders for the purpose it had been introduced – risk and reward were finally being interlinked, in the real world.

When I went to the bank website and also called the helpline to confirm, I was shocked to find out that:
· The interest rate had been increased significantly.
· It had been increased ‘blanket’ for all credit cards.
· The increase had nothing to do with my credit history or score.

What a price to pay for loyalty and good credit behaviour!

So I am wondering what could have caused this increase and I came up with the following possible reasons:
· Too many credit card defaults and write-offs – so increase rates to recover some of those losses from good customers.
· Internal costs (people, technology, salaries, bonuses, etc.) had gone up – so increase rates to recover some of those increased costs from good customers.
· Higher revenue targets set internally – so increase rates to meet those targets, again from good customers.

And again, I am wondering – whatever happened to good credit behaviour being rewarded and all that stuff?

Nearly 10 years after the credit bureau industry debut in India, why don’t the report and the score play any role in determining interest rates on card renewal, card issue and on giving loans?

And why does the regulator allow such high rates (nearly 35-40% p.a.) to be charged to meet write-offs, bad debts and high operational and internal costs?

Meanwhile, I am contemplating a switch of my credit card issuer, but the question is – is this jumping from the frying pan into the fire or a choice between the devil and the deep sea?

For the time being, I guess I will continue with my existing credit card, but here is some food for thought – is there a way to break this cycle or, like a lot of things, should it be chalta hai, chalne do (let it continue as it is)?

Watch this space next week for the concluding part of this topic – some possible ways to break the logjam.

About the author: Satish Mehta is the Founder and Director of Credexpert, a credit and debt counselling company in India.