Impact of Credit Card on Consumer Behavior

Abstract

Credit card can be useful tool for consumers build credit and grow their credit scores. On the other side they can be harmful when people depend on credit card to pay for all their expenses and fail to pay their credit balance. The main motive of this study was to investigate the impact of credit card on consumer savings. The use of credit card has been on the increase for the past few years. To date many people do not clearly understand how they use credit card and how much percent of interest charged if they fail to repay the money borrowed by them. With credit card people are able to purchase certain goods and services without having money in their pockets and accounts. All in this process they spend large amount of money on purchasing good and services which results in serious debt. However, if they managed credit card properly it can be beneficial for them because it offer safety and convince to the purchasing process. The investigation found that the majority of respondents are experiencing financial difficulties as they have to fail to keep up with repayment on their credit card debt. The research analysis that to protect consumer savings there have a warning sign and on the other hand before issue the credit card banks must create awareness among consumer about warning sign, interest rate and how to use it.

Introduction

World first credit card is issued by Oil Company in 1940. Credit card is a payment card issued to cardholder to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the bank. The size of most credit cards is 85.60 by 53.98 millimeters (3 3⁄8 in × 2 1⁄8 in) and rounded corners with a radius of 2.88–3.48 millimeters (9⁄80–11⁄80 in) conforming to the ISO/IEC 7810 ID-1 standard, the same size as ATM cards and other payment cards, such as cards. The use of credit cards originated in the United States during the 1920s, when individual firms, such as oil companies and hotel chains, began issuing them to customers for purchases made at company outlets. The first universal credit card, which could be used at a variety of establishments, was introduced by the Diners’ Club, Inc., in 1950. Another major card of this type, known as a travel and entertainment card, was established by the American Express Company in 1958k to pay them for the amounts plus the other agreed charges. The purpose of this study has been to investigate the impact of credit card on consumer savings. This is because it observed that many people get in to serious debt due to overspending on cards because there has no warning sign and no idea about interest charged by the bank if they fail to repay the money. It should be noted that without discipline and adequate knowledge credit card can lead to serious financial hardships because consumers do not feel the pain associated with spending cash when using credit card and as a result fail to notice and monitor to their overspending behavior as a result consumers who fail to clear their balances on time that is given by bank incur-high interest charges by banks.

Review of literature

The Credit card service has started gaining momentum due to the wide publicity given to it. The users feel that acquiring a credit card is an easy way of getting unsecured credit. What the consumers must know and bankers are obliged to make the consumers of this service know, is the utility and various charges 8 imposed upon the credit card usage. This literature survey covers various studies made in credit card services relating to awareness, satisfaction and problems of cardholders in credit card usage.

Worthington, Steve (2009) discussed the prevention of complacency regarding payment card fraud particularly debit card fraud. It was found out that of card fraud particularly on master card and visa branded debit card is often hidden among the statistics for over all payment card for with the use and adoption of online payment system increases the risk of debit card fraud.

Mathewtingchi (2009) has conducted a study how a redemption reward program of credit card works in China. The study seeks to assess Chinese credit card user’s level of awareness about the reward point program. The factors affecting the redemption of reward points. It has been concluded that lack of awareness about the reward point program and the redemption procedure was shown. Low customer awareness about point based reward program and not surprisingly low redemption rates were also discovered. A positive attitude about incentives of credit card usage. It has been concluded that redemption behavior and credit card usage habits may be changed in time of financial crises.

Phau, Ian and Woo, Charise, (2008) investigated attitude and credit card usage between compulsive and non-compulsive buyers of young Australian. The finding reveals that compulsive buyers are likely to perceive money as a source of power and prestige. They frequently use credit card and are more likely to bargain. According to this study there is no difference between compulsive and no compulsive buyers of credit cards.

Data Analysis

According to the study the following fact are found.

• Nearly half of Indians with credit cards carry debt on them from month to month. With average interest rates rising 35% in five years, that debt has gotten a lot more expensive.
• Indians are delinquent on billions in credit card debt. The most common reason for failing payments is overspending.
• Unsecured cards marketed to those with poor credit come with high fees and low limits that leave cardholders perpetually maxed out.
• People with bad credit are a very large and verity market, and therefor issuers are taking advantage so that credit card debt is more expensive.
• Most of the customer are not perfectly knowledge about credit card usage and percentage of interest charged by bank.
• Study analysis that highest credit card circulation is in the year of 2008 and lowest in 2010 and 2015 it again rise and 2011 the circulation is fall.

Objectives of the study:

1. To study the Impact of Credit Card on Consumer Behavior.
2. To Study that How to manage and Control the use of Credit Card.
3. To Study consumer Financial Knowledge about Credit Card Usage.
4. To find the difficulties about repayment the credit card debt.

Research Methodology

The kind of research is conducted is analytical research, as it is most suitable to the purpose of Project Research. In this Research the information and facts are gained from Secondary sources have been used to make an analysis of Credit Card impact on Consumer Behavior. That is analyzing the data & extracting the relevant important data to complete the Project and make it relevant to the present situation that are facing by consumer to the use of credit card. The data of present study is collected from various sources like Newspaper, Internet, Books and Yearly published reports etc.

Current Scenario

In order to encourage the use of the card, the policy initiatives and the regulatory stance of the Reserve Bank of India have been focusing on increasing the acceptance and penetration of safe, secure and efficient non-cash payment modes comprising cheques, credit/debit cards, and transactions through ECS/RTGS/NEFT, over the years. The total number of outstanding credit cards and debit cards as at the end of March 2012 was 17.65 million and 278million respectively. Although the credit receivables as a percentage to the total retail loan portfolio remained at 2.56% during 2010-11 and 2011-12, the increase in the absolute amount in card receivables was Rs.36 billion constituting an increase of 20% during the aforesaid years. In the last decade, while the issuance of credit cards declined, cards showed a positive growth trend. Today, opening an account, a customer is given an ATM cum Debit card. This is one of the reasons why the increase in debit cards has been more than credit cards. It has been seen that some consumers shy away from credit cards in view of high rates of interest on credit and penal rates on delay/default. As per the report of RBI, more than three-fourths of the total debit cards issued / in use, as at the end of March 2012, were issued by public sector banks. In contrast, more than half of the credit cards were issued be new private sector banks and foreign banks.

Suggestion

• RBI should make policy about credit card usage.
• Banks should give financial knowledge before issuing credit card to the customer.
• There should have warning sign on overspending.
• Banks should have Internal Control System formulated by central Bank of the country to fight frauds.
• Banks should have reduce high interest charges on credit card.
• Banks have to timely update about changes in interest rate and also aware about high percentage of interest rate that is charged on failure of repayment.
• Credit Card limit should be provided according to the Income of the consumer.

Conclusion

High Credit Card limit identified the major cause of financial debt. It also investigate in the study that increased awareness and understanding about Credit Card usage will reduce the Credit Card debt. In research many consumer take credit card positively because of cashless dealing, internet shopping, tele-purchases and payment to the future date. According to them Bank offer them low interest rate and high credit limit. Research found that credit provider some time adopt it for their product promotion and to acquire their customer. Data on attitudes credit card holder in 2001 Survey of Consumer shows that about 40% of the card holder find self-control problem and possibility of overspending from credit card. RBI should make a policy regarding overspending and also give an instruction to the bank of giving financial knowledge and how to use it before issuing the credit card. It is also observed that credit card limit should be provided according to the income of the consumer therefore high limit should provide to high income customer and low limit should provide to low income consumer. The research find the there is a warning sign on overspending and also bank should give timely update on credit card spending and update about percentage of high interest rate that is charged if they fail on repayment of debt.

References

1. Robert et. al, (2001) 'Attitudes and Intentions Towards Credit Card Use and Compulsive Buying Among American College.
2. C. Prakash (2003) “Impact of Credit Cards on Spending Patterns”. 36Global Journal of Management and Business Research Volume XVIII Issue III Version I Year 2018 © 2018 Global Journals
3. Elif et. al, (2009) “The Impact of Credit Cards on Spending: A Field Experiment”.
4. Sebastien and Cathy (2012) “Paper or Plastic? Money and Credit as Means of Payment“.
5. Credit Cards Industry - Use and abuse”, Business World; July, 2007; pp. 54-59.
6. Slocum, J. and L-. Mathews (1970)', in their study “Social class and Income indicators of consumer credit behavior”.