Credit card: A wealth hazard in this weak economic situation?

Indah Suksmaningsih, Jakarta

A credit card customer in Jakarta recently lodged a complaint with the Indonesian Consumers Foundation (YLKI) that a private bank had been automatically charging his account a monthly fee of Rp 15,000 (some US$1.6), without his knowledge.

Later, he learned the issuer had offered a consultation service to card holders, which would give them access to a second opinion abroad for health services.

In the disclosure statement, the issuer included a clause saying that should the bank fail to receive confirmation or cancellation from the customer a month after the receipt of the credit card, the bank would consider that the customer had approved the offer and, therefore, all charges to come would be deducted from his credit card.

The above example is but one of many common practices employed by credit card issuers here. Such practices, which put consumers in a disadvantageous situation, are prohibited in other countries, like Australia.

Deputy chairman of the Australian Prudential Regulation Authority Ross Jones says customers should ignore unsolicited deliveries sent with directions for the customer to return the deliveries within a certain period of time, or pay up.

"Customers should ignore such requirements in accordance with the Trade Practice Act. Such a practice also prevails in financial services. The supplier must ensure that they obtain the customers' signatures (as evidence of approval)," Jones said recently.

Such an unethical practice is likely to be done intentionally after learning of weak consumer protection measures, low political will in law enforcement and uncritical consumers that do not care enough about the terms and conditions commonly found in the standard forms of agreement between card issuers and their customers.

Consumers often, without a clear understanding of the implications of the provisions in the agreement, habitually sign for the acceptance of the card, and by doing so have agreed to be bound by these terms and conditions.

Another consumer wrote a complaint letter to the YLKI, surprised to see the "scary" figures on her balance. She confidently said she had completed her obligations and paid the minimum payment on time.

This seems to be the pattern of people that come to the YLKI to file complains.

Many may have overlooked a warning stated in a leading American magazine, Consumer Report (1996), which cites "If you pay the minimum balance each month many cards wont be paid off for 20 years or more. People who carry over a balance from month to month -- and pay interest on it -- are the least likely to know what interest rates they are being charged."

More interesting is the statement of the Indonesia Retailers Association: "the fuel price increase does not change people's consumption pattern, be it products in department stores or groceries. What seems to have changed is how they pay. Unlike previously, when credit cards were used to buy products in department stores, nowadays credit cards are used even for groceries. The easy availability of credit has seduced millions of people into spending what they don't have."

The credit card business has become a lucrative business that attracts local and foreign banks alike. One bank claimed 70 percent of credit card issuer's income is raised from the interest. The rest comes from the cash-advance charge and other fees. The card companies also collect from merchants, who pay an issuer a fee of two to four percent for every purchase.

The volume of credit card transactions in 2004 reached Rp 37.6 trillion, which is a 100 percent increase from the figure in 2001 (Rp 19.2 trillion).

It could be assumed that the pseudo purchasing power offered by credit cards during the financial crisis encouraged a wealth hazard that is harmful for everyone: the government, cards issuers and consumers.

It is vital for the government and providers to be wary of the emergence of pseudo purchasing power, or people spending what they do not have.

This assumption is confirmed by the central bank's report that the total outstanding balance hovered at Rp 11.7 trillion in 2004. This figure of outstanding balance indicates that many -- if not most -- card holders used their credit cards without care or caution, and more importantly, did not settle their credit before the due date. Rather they opted to pay only the minimum monthly five or three percent, incurring the heavy penalty of interest charged on their outstanding balance.

Since 2003, the national total for revolving credit -- the amount of debt carried over from one month to the next -- has climbed by 20 percent, from Rp 9.8 trillion to Rp 11.7 trillion in 2004. Meanwhile, non-performing loans (NPL) increased from 8 percent in 2003 to 8.7 percent in 2004, amounting to Rp 1.02 trillion.

The issue of pseudo purchasing power is also evident in recent complaints filed by consumers with the YLKI and the central bank under the three-month complaint handling program.

Within the first month of the program as many as 220 complaints were filed -- almost 60 percent of which concerned the problem of inability to pay off growing debts. Worse still, some issuers reportedly hire debt collectors, who used threats or worse to intimidate not only the card holders, but also their families and colleagues.

Second from the top is doubled-up bills. Consumers are complaining over providers' poor administration and carelessness. Paid bills are shown on the next month's bill.

Ranked third is "interest on interest".

The fourth is bills for transactions that consumers have not made. Last but not least is the rejection of credit cards. Consumers find it humiliating to be "rejected" in public, while providers do not consider the consumers' feelings.

Unfortunately, after over 10 years, credit card use here is still largely unregulated. In December last year, the central bank issued a regulation in order to better protect consumers and prevent them from being fooled by credit card issuers.

Under the regulation, the central bank requires issuers to apply more stringent selection procedures, including a minimum age for card holders and a minimum annual income.

These sorts of preventive measures seem to be what is needed, particularly as consumers are put under financial pressure due to the fuel price increase.

Remember, if credit card companies handle you roughly, you are pretty much on your own because the protection mechanisms are not yet in place.

The writer is the chairperson of the Indonesian Consumers Foundation (YLKI)