Punished for good financial behaviour?

You may be making payments on time and never rolling over credit, but the card issuer can raise interest rates and fee as it is not earning anything from you

You think it always pays to maintain discipline in your financial transactions. You always repay credit card bills on time and avoid rolling over the outstanding amount for the cost of negligence would mean paying exorbitant interest rates in case, of the entire amount is not paid by the due date. Many card holders even believe that maintaining good behaviour may enable them to reduce the interest cost. But they could be surprised to find that good behaviour doesn't always earn them a reward. In fact, if you are a disciplined customer, card issuers can raise interest rates as they are not earning money from you.

Interest on credit card outstanding
Interest is charged on a credit card when the customer does not make the full payment of the amount outstanding by the due date. A minimum payment can be made and the balance can be rolled over. The cost of doing so is the interest that gets levied on both the existing amount outstanding and the additional spends made on the credit card. The rate of interest is very high-it can range from 24-48 per cent per annum, far more than what one pays on other types of borrowings. That is why most customers don't want this interest charge to be levied on them.

Higher interest payment
A customer's normal experience is that if he does not pay the full amount outstanding on time, he is charged interest. Most people hence try to pay up on time. The logical conclusion is that if one is regular in making payments by the due date, the issuer bank will reduce the interest rate charged to them. This often turns out to be an illusion. In many cases, banks have actually raised the rates applicable to such customers. The most common reason why a higher rate may be charged on your credit card is that the bank has raised the rate it levies on all or many of its customers. If this is the case, there is nothing that the individual can do to ensure that the rise is not applicable to him. The bank may have evaluated the credit card business and the risks therein. If it found that either the losses or the risks were high, it may have raised the interest charged to compensate for this. The higher rate then becomes applicable to all the customers. The best way to avoid the impact is to ensure that one does not ever fall into the rollover cycle.

Poor credit score
Sometimes the interest cost on your credit card could rise due to personal reasons. One of these could be that your credit score has deteriorated. This could be due to a temporary shortage of funds that led to payments on loans being missed. If the bank discovers that your credit score has declined, it could raise the interest charged on your credit card outstanding. By doing so, the bank tries to compensate for the higher risk it takes by lending to such individuals.

Usage details
How you use your credit card could also cause the bank to review the interest rate. One reason could be that you use the credit limit on the card to the hilt most of the time. You may also be making international expenses on the card during your trips abroad. This could raise the level of risk on the card. If the bank is closely monitoring the situation, and if it seeks to reduce the risk on the card, one option before it is to impose restrictions on its use, especially abroad. The other option it could adopt is to raise the interest charged on the card.

CARD SMART

• Good behaviour may not always fetch rewards
   
• The interest rates charged on credit cards are range between 24 per cent and 48 per cent
   
• The best way to use credit cards is to pay the entire amount by the due date
   
• Such good behaviour may not save the individual from getting charged a higher interest rate when they miss payments
   
• The bank may have raised the interest rate charged from most of its customers
   
• A poor credit score could result in interest rates being raised
   
• Using the card to its limit or using it abroad during foreign trips could raise the risk on the card and the bank may respond by raising the interest rate
   
• Sometimes, the bank may raise interest rate because you never roll over credit and don't give the bank enough opportunity to earn money from you

Good behaviour
Sometimes, paradoxically, even good behaviour can result in negative consequences for the card user. The individual may always be making payments on time and never be rolling over credit on the card. Such exemplary behaviour means that the bank never gets an opportunity to make money from the user. In this case, too, there is a chance that the bank could actually raise the interest rate applicable on the credit card. This would ensure that in case there is a missed payment on the card, the fees that accrue would be higher and would suffice to meet the expenses incurred by the bank on maintaining the card. This is a case where good behaviour is actually punished. But in the world of finance there are many such situations and one has to be alert about them.

The writer is a certified financial planner