“Experience the freedom”, is the catch phrase of one of the major local credit cards. Others are said to make the world go round. Credit card companies compete fiercely for attention, and clientele. The attraction, however, can be quite deceptive.

Credit cards to the unsuspecting eye, promise economic power; allowing the holder to spend money that they don’t have.  In real terms, a credit card is no more than a system of credit. It allows the holder to obtain goods and services that are paid for on their behalf by the bank. In return, the card holder pays up to the bank the monies expended on their account.

Every applicant for a credit card has to sign a contract with the bank issuing them with a card. The contract provides for the operation of a credit account by the holder, and lays out the terms and conditions upon which the holder can pledge the bank’s credit. One of the chief conditions of issue of a credit card is it remains the property of the bank. The bank may, without reason or notice, withdraw it from the holder. This condition has the practical result of allowing the ban to take away the card from any holder who breaches its conditions of use. The bank usually issues a circular to all establishments where the card may be used, requiring them to take possession of the card should it be presented there.

Another principal condition of issue of the credit card is in respect to the payment of interest. Every holder of a credit card has to agree to pay the interest that is levied by the bank, in respect of the sums due from the holder. This condition also has practical results in the event of litigation between the bank and holder. In a suit for recovery of money, the successful plaintiff is entitled to interest on the monies due from debtor at rate currently awarded by the courts. Presently, court rates stand at 12 per cent. There is a wide berth between current bank rates of interest and those awarded by the courts.

In the absence of a contract with a debtor, the bank is not entitled to recover any interests above the court rates. While the debtor had contracted to repay the amounts due to the bank and the courts will condemn them to do so at court rates of interest, the courts will only order payment at bank rates of interest, the courts will only order payment at bank rates of interest, where such rate is an express condition of the contract between them and the bank. No bank has a right to charge interest on a client who has not contracted to it.

This rule on interest has been extended by courts to cover instances where the contract the bank and the client has ceased. In the case of credit cards, this happens when the card is withdrawn, when the bank closes the card’s account or sues for recovery. At that point the card holder ceases to be a client of the bank and becomes a debtor. When the contract has ceased, the right to charge interest at bank rates is lost. The relationship of banker and customer ceases and that of creditor and debtor begins. The bank now becomes entitled only to the court rates of interest, and only on a simple basis, as the right to compound rate of interest is also lost.

The banks, therefore, cover themselves against this law by having the card holder contract for payment of interest in all instances. The banks may require the card holder to pay for interest for all credit advanced and for late payment. Late payment charges may be required even after the withdrawal of the card and the institution of a law suit. For instance, a clause in the contracts of one of the local credit card providers states that: “The bank may at any time and without notice, cancel or suspend the right to use any card entirely or in respect of specific facilities, or refuse to reissue, renew or replace any card without in any way affecting the card holder’s obligations under this agreement which shall continue in force.”

The bank issuing the card will also normally cover itself in respect of unauthorised use of the card. The fraudulent use of a credit card by an unauthorized person brings about the complications on the issue of liability. Normally, the card holder will only be liable for the credit they receive at the bank’s guarantee. The bank, it would thus seem, would have to take in the loss arising out of its extending credit to an unauthorised user of the card.

To remove any complications, the prudent bank will require the bank holder to take care of the card, not lose it, and to contract the card holder to meet all loss arising from its unauthorised use. Such liability can only cease after a written notification of the loss to the bank and after the bank has had adequate time, usually a few days, to send a circular to all establishments. After such circular is sent, liability solely lies with the establishment that accepts the card.

The banks issuing credit cards have to draw up the contracts with card holders particularly meticulously, tom avoid costly ambiguities. A misunderstanding on payment of interest, or an unauthorised use of the card could cost the bank hefty losses. The contracts for use of credit cards are therefore very carefully drafted, and offered on a take it or leave it basis. The onus lies with the card holder, once they have signed the contract, to be prudent in their dealings.

The prudence of the card holder comes in handy where he is unable to meet his repayments to the bank. Most people faced with the pecuniary embarrassment sit back and let the bank do what it pleases to recover. There is no worse a plaintiff, no more ferocious a litigant, no more ruthless a gladiator, than a bank against a debtor.

Since interest keeps accruing on the debt, and the unpaid money keeps earning a profit, the bank has the patience of an elephant, and will wait indefinitely for a lawsuit to drag on to completion. Secondly, because it is a money monster, the bank will always hire the best lawyers. A defaulter has thus no chance in a lawsuit instituted by the bank. Only the most ill-advised defaulters allow this most unfortunate circumstance to arise. The way to avoid this is do not ignore the bank, and whatever else you may do, do not break your promises.

If you are a card holder and find yourself in default, follow the following rules:

  • Call the bank manager and acknowledge that you are in default. Do not wait for a demand letter.
  • Give an offer on how you wish to pay off the debt. Take into consideration that the debt accrues interest all while at a punitive rate, which the bank would have contracted you to sign in the event of default. Do not try to take advantage of the situation by fighting for easy repayment terms. The only result you should try to achieve is to prevent a lawsuit or the foreclosure on a mortgage.
  • Once the bank manager has accepted your offer or whatever agreement you may have come to, make sure you do not default. If, for whatever reason, you cannot meet one of the payments, talk to the bank and offer to make amends on your next payment.
  • If you can pay more than the agreed installments, do so. You will need the goodwill in case of future default in installments. Never let the bank think that you are trying to get away with it.
  • In case the bank sues you, get yourself a good lawyer with instructions to negotiate an out of court settlement. Since the debt is an investment to the bank, it is not in a hurry to wipe it off as long as the interest is being paid and thus a profit being made.
  • Lastly, unless you are hopelessly optimistic, do not wait until the bank has a judgment against you. At that time, the bank will not negotiate, its lawyers will not take your calls, and only God can save your property from public auction.