Credit Cards are both boom and doom for a user. The scenario depends on how good a user is in debt or credit management. I using credit cards from last 12 years and i have never defaulted on bill payments of the credit cards. I am not saying that i am the BEST in debt management but i learned fast from my initial mistakes. Once i knew the tricks of the trade i turned, credit cards to my advantage. I shared some of these tricks in my posts, Credit Card – Save While You Spend and How to Use Credit Cards Smartly? Otherwise, credit cards can be a wealth destroyer.
As a customer, i am playing tricks and similarly, the bank also plays tricks with the customers :). If i PAY my credit card bills on time then from bank’s perspective i am a BAD Customer. The bank can compensate by making me spend more. This, in fact, is one of the key objectives of a bank i.e. to make customer’s SPEND more. It will help banks to EARN more. I will explain it in detail in my next post, How Credit Card Companies Make Money or Earn Profit?
Also Read: 7 Tips to Select the Right Credit Card
7 Tricks How Banks Make You Spend More On Your Credit Cards
1. Offer Add-on Credit Cards:
By offering add-on credit cards, bank hit three birds with one stone
(a) Make the user spend more
(b) Kill competition
(c) Indirectly acquire creditworthy customers
Let me again share my example in this case. I am using the credit card of Bank A from 2004. At regular intervals, the bank kept offering me Add-on credit card. When i got married, i availed it for my wife. Needless to mention, the bank achieved the target to spend more :).
Now in the same example, bank killed competition. If i would not have opted for add-on credit card then my wife was about to apply for a credit card with the Bank B. Therefore, Banks kill competition by offering Add-on credit cards.
Lastly, the responsibility to clear bill rests on me and bank always ride on the creditworthiness of primary cardholder to acquire secondary cardholder. It mitigates the risk of a bank.
2. Credit Card Limit:
In layman terms, credit card limit is like a money lying in my savings account (perception). In last 12 years, Bank A has increased my credit card limit 6 times and now it is 12 times the original limit. I always opted for the increase as Credit Card Limit help to improve CIBIL Score. Higher Credit Limit means high credit worthiness.
It is a human psychology to spend more if i have more money in hand/at discretion. Worldwide, govt and central banks adopt this strategy to boost the spending & grow the economy. The increase in spending means more demand. The banks also adopt this strategy to make customers spend more on credit cards. I follow a thumb rule not to utilize more than 30% credit card limit. When my total credit card limit was 50k then my utilization threshold was approx 17k. My threshold automatically increased to approx 1L when bank increased my credit card limit to 3L.
Therefore, increase in credit card limit is both good and bad. Good because it increases your credit worthiness and Bad because it makes you spend more.
3. EMI offers:
Trust me EMI offers are too tempting to spend more. Especially during festive season banks run these offers. Prima facie, it seems that bank run these offers for a noble cause to make you buy a product you always wanted to buy. The fact of the matter is that by offering EMI, the bank is indirectly increasing affordability and secondly bank is making customers spend more on credit cards. A customer should utilize such offers only for need not for want or luxury.
For example, i bought a new LED TV on EMI because my daughter damaged my old TV. Instead of paying lump sum 60k, i preferred 12 EMI’s of 5k each. The catch is EMI offer availed by me was Zero Interest Rate offer. There are two types of EMI offers i.e. Interest-free and with interest. Normally, the interest charged is between 13% to 15%.
To purchase need based product at 0% interest is Good but the purchase of want/luxury product by availing EMI offer at 13% interest is BAD.
4. Free Promotions:
Free promotions is basically a chain to make you spend more. Last year, my brother was trapped in one such free promotion. The offer was to spend more than Rs 50k in a calendar month and the customer was eligible for gift coupons/vouchers worth Rs 5k. The free promotion sounded good i.e. an indirect discount of 10%.
When my brother received gift vouchers, he was shocked. He received 10 gift vouchers of Rs 500 each from different merchants. The catch was, To redeem the gift vouchers, min spend of Rs 2500 was required through same bank’s credit card. Therefore, at the end of the day, the free promotions on credit cards is to ensure higher spend. You can find these offers on your credit card bill statement.
Sometimes, the free promotions are genuine also so that the trust of the customer is not completely broken :). Last month while booking a movie ticket i got 1 ticket free on the purchase of 2 movie tickets. Therefore, all free promotion offers are not fake. It is important to understand the terms and conditions.
5. Cashback Offers:
I covered it in detail in the post, Cashback offers – 5 Points to check before purchase. Recently, i availed one such offer on an e-commerce site. On a purchase of Rs 5,000 or more, the bank was offering cashback of Rs 500.
6. Upgrade to Premium Credit Card:
When i opted for a credit card there were only 3 types of credit cards i.e. Basic, Silver and Gold. I received Silver credit card and i was on cloud 9. Today there are 10-12 types of credit cards i.e. platinum, titanium, solitaire, gold etc. The basic and silver credit cards died their natural death. Holding a premium credit card is a style statement. It also comes with its own benefits.
Normally, banks offer credit card upgrade every 2-3 years but only to those customers whose spend on a credit card is consistently increasing. I do receive queries from readers on how they can get a premium credit card. The strategy of the bank is to offer entry level card and then upgrade based on usage. Nothing wrong in it. In some cases, readers of this blog called banks to check how to get a premium credit card and bank replied that it depends on usage. Some readers start spending more on credit cards just to upgrade.
Alternatively, the customer can opt for the premium card by paying annual fees. The annual fees start from Rs 2,500. Now another catch is that banks started offering a waiver on annual fees of credit cards if the min spend exceed the threshold. For example, if i spend more than 2.5L during the year then my annual fees of Rs 2,500 will be waived off. Thus, the objective is to make customer spend more on credit cards else bank charge cost of providing a credit card to the customer.
7. Threat of Downgrade:
If you spend more, there is an incentive of an upgrade. Similarly, if the spend on the card is less, then there is a threat of a downgrade. It is a negative way to make credit card users spend more. A few years back, i was using 3 credit cards. One of the credit cards was rarely used. I received SMS that based on my usage bank has decided to reduce my credit limit by 1L. When i called customer care to check, i was told that either i use my credit card min Rs 10k per month or bank will downgrade.
As i was holding 3 credit cards, therefore, i decided to cancel the credit card that was least used. With stricter norms and checks, it is difficult to get a credit card these days. If there is a threat of downgrade then the customer will definitely spend more to retain the credit limit and premium credit card.
Words of Wisdom:
As i keep highlighting that you should only spend that much you can pay. Else it will be an open invitation to the financial crisis. It is bank’s business to make you spend more but at the end of the day, if i default then only i will suffer. On the other hand, the bank will gain in both the scenarios i.e. if i spend more or if i pay interest at 42% p.a. on default amount. Always remember bank is not providing any service for free and earning money/profit. To know how, please check out my next post on How Credit Card Companies Make Money or Earn Profit?
Copyright © Nitin Bhatia. All Rights Reserved.
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