When a bank issues a credit card to a consumer, it provides the option to avail a short-term credit with the bank. Whenever a credit card is used with a merchant, the bank makes the payment on behalf of the consumer, and this credit has to be paid back to the bank within a specified period (generally 20 days from the billing date). When a customer fails to repay the credit, a situation of credit card default arises. From the date of default, the bank has the right to recover the amount due.
Consequences of credit card default-
Laws require the customer to pay back the bank for the credit. The bank is now legally entitled to recoup the money as a result. The bank doesn’t file a lawsuit right away for the same reason. Instead, without the need for court intervention, it follows a set of procedures to recover the money.
Some of the consequences of a credit card default are as follows:
1. Late payment fee
The bank can levy a late payment fee in case the payment is not made before the due date.
2. Higher interest rate
The bank has an option to levy not only a late fee but also a very high rate of interest on the outstanding amount. The rate of interest can be as high as 40% per annum. This leads to a debt trap for the defaulter.
3. Credit score
The credit score of a person can be understood as his creditworthiness. In other words, a credit score is an indicator of how likely it is that a person will make the payment of a debt on time. The higher the credit score, the better the interest rates one gets on loans. If a person is a credit card defaulter, his credit score could be adversely impacted. This also ultimately affects an individual’s ability to get a future loan.
4. Blocking of the credit card
The bank has the option to block the credit card account in case of a default, which in turn, impacts the credit score and makes it difficult for the defaulter to obtain new credit cards or even a loan.
5. Asset acquisition
In a few cases, the bank also has the option to seize the assets of the defaulter. Any condition to the same effect must be checked in the “Most Important Terms and Conditions” while applying for the credit card.
6. Legal action
If the person fails to make timely payment of a credit card bill, the bank can approach a civil court of proper jurisdiction for the recovery of money due by the cardholder. In certain circumstances, if the default is continuing and the bank is able to identify the mala fide intention of the defaulter, a criminal action under Section 420 of the Indian Penal Code, 1860, may be initiated. However, this is not a common practice as the mala fide intention is difficult to prove.
7. Recovery by Agents
Most of the banks and financial institutions have their own recovery houses. In prolonged delay of repayment of debt, a bank may even send a recovery agent to put pressure on the debtor and recover their debt. Though this method is unethical and may not be true in all cases, banks do exercise this option to recover their debt.
Legal provisions surrounding a credit card default-
A credit card payment default is interpreted as a loan payment default. Therefore, the same laws that apply to loan defaults also apply to credit card defaults. It frequently occurs that the debtor uses a cheque to settle the outstanding balance. In situations like these, banks frequently turn to Section 138 of the Negotiable Instruments Act of 1881 in the event that a cheque bounce.
As for the civil remedies for a credit card default, a recovery suit under Order XXXVII of the Code of Civil Procedure, 1908 can be filed by the bank. Order XXXVII Rule 1 provides that the Order shall be applicable in suits involving bills of exchange, promissory notes, hundies, etc., and where the plaintiff seeks to recover a debt from the defendant, with or without interest. The debt may arise out of either a written contract, an enactment, or a guarantee. Suits under Order XXXVII are of the nature of a summary suit, which provides for expedient disposal of a suit, thus providing additional procedures than an ordinary suit.
Conclusion-
The entry of various multinational banks has spread the culture of using credit cards among all classes, including the middle class, lower-middle class, and low income families. However, the hardships arising out of this culture are to be faced only by the lower income groups. The banks often sell these services while withholding crucial information regarding the consequences of a credit card default. Information about the high interest rates, charges, and fines in the event of a credit card default is hidden in the fine-print of the terms and conditions, which is more than often ignored by a consumer. It is only when a credit card default takes place that the “witch-hunt begins”