Imagine this scenario: a customer of a commercial bank holds a credit card of the bank and has made purchases in thousands of dollars. The bank sends the bill to the customer as per the billing cycle. The customer however, opts for paying the bill in installments along with an interest. So far this proposition seems to be profitable for the bank because the bank stands to gain additional revenue and the customer shells out extra money from the pocket.
However, the problem begins when the customer plays truant and does not pay the amount as agreed on a monthly basis. The bank runs up losses in thousands of dollars which includes the operating cost, the recovery charges, and the interest, just to mention a few. This scenario is known as the credit card debt, which has been the bane of many banks in the United States of America.
What are the reasons that the credit card debt crisis occurs? There are a number of reasons:
The banks cannot really coerce a customer to pay the installments or use any other method to put force since that is illegal and should the banks do this, the banks can go to the wrong side of the law. The customers, who are aware of this scenario or the legal weakness of the bank, and are willing to commit such acts of not paying up, can easily take advantage of the bank's vulnerability.
The Credit Card debt is an unsecured debt. This means that the bank does not have any mortgage or any collateral against which the debt is taken. Hence, when the customer refuses to pay the installments and the bank cannot coerce the customer to pay up, the bank cannot confiscate any collateral. In other words, unlike the car loans or the home loans, there is no collateral for the credit card loans.
Most banks, in desperation to increase their sales, distribute credit cards without even checking the credentials of the customer or the credit card applicant properly. The financial background and the ability of the applicant to repay the loan are not checked scrupulously.
What can be done to reduce credit card debt, while accepting that it is not possible to reduce this to zero? The only way seems to be a scrupulous check of the background of the applicant.
The banks need to check the background and the financial solvency of the applicant and attach scores based on which the application can be granted or denied. Also credit card debt relief or debt relief measures like restructuring the loan on softer terms for the customer may prove helpful in encouraging the customer to pay the loan back.
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