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Monday, 25 July 2011

International Card Services (ICS) in The Netherlands increases the interest rate on card debt from 15 to 16%: a serious reminder that credit card debt is not for free at all.

When my career as a financial ICT-consultant started in 1998, the first company I worked for was Visa Card Services (now International Card Services or ICS), at the time the sole issuer in The Netherlands for Visa credit cards. 

I stayed there from 1998 until 2003 and had a wonderful time at this friendly, service-oriented and innovative company. Now it is eight years later and I still think with much pleasure of this company, that brought me financial knowledge, loads of working experience and job competence.

But today I was triggered by an article about what you could call the ‘dark side’ of ICS: the interest rate on credit card debt.

Today, ICS issued a press release that they increased the interest rate on credit card debt from 15% to 16%. This number, although it is not exceptionally high in comparison with other credit card issuers in Europe or the US, is in my opinion at the verge of loan sharking.

And it is quite easy to pay this kind of interest on your credit card debt. You don’t have to do much for this. In most cases, it is about what you don’t do as a customer: paying your bill in full.

To explain this: the worst kind of customer for ICS is a customer that doesn’t spend more than his credit card limit and pays his bill in full, once a month. At ICS in The Netherlands, a customer that pays his bill in full every month and stays within the limits, pays no charges at all on his credit card, except for the yearly subscription fee.

But if you ‘decide’ to pay back your credit card debt in installments, you do pay interest. And a lot of customers are initially not aware that they pay in installments.

This is how it works: a customer creates a credit card debt by shopping or by doing cash withdrawals and receives a monthly bill/statement for this.
If the customer can’t pay this debt back in full, because he forgets it or he just can’t do so at the time, his account is automatically changed to a 2.5% redemption account.

From that time on, he can keep on spending until he reaches his limit and he only has to pay back 2.5% of his credit card debt every month. And that is when the taximeter is running.

If a customer has a credit card debt of €3000 and he pays the total amount back in 40 installments at 16% annual interest, he pays a staggering amount of €3857.50 for a 3year4months loan.

But this is not what happens mostly: in practice, the customer probably keeps on using his credit card until he hits ‘his’ debt ceiling. And that is when the customer pays a whole lot more, especially when he decides to raise his debt ceiling.

At one time, the customer can get stuck with a credit card debt that he can’t afford to pay back anymore.

When you are already on a 2.5% redemption with your credit card and you want to prevent the former from happening, the solution is simple:
  • pay your open credit card amount back in full.
  • If you can’t afford to pay the amount back in full, try to get a personal loan or revolving credit at much lower interest rates (f.i. 7%) and repay your credit card debt with that.
    • Don’t use your revolving credit as a new way to get into trouble
  • Reinstate the 100% redemption on your credit card.
  • And never spend more than you can afford from your monthly wages.
And if you are not sure that you can stop spending in time when you have a credit card, abolish the credit card and take a debit-card instead.

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