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Paying Tomorrow for a Burger Today

Little plastic cards are passports to Costa Rican consumers’ wildest dreams, but they could also be the source of future nightmares.

Recent reports show that Ticos have taken to buying on credit over the past year when interest rates were relatively low. But the financial climate has taken a shift recently, with interest rates on the up-tick.

Ballooning debt and rising interest rates could portend a load of financial pain for the borrowers in the future.

Not knowing how to responsibly use credit by always paying their balance could trap them in a “vicious cycle,” said Oswald Céspedes, project director at the CentralAmericanAcademy.

“There are times when people use their credit cards without knowing the consequences,” Céspedes said.

Consumer credit has risen 49 percent over last year, spiking from ¢1.2 trillion colones ($2.4 billion) to almost ¢1.9 trillion.

That represents a third of total debt (¢6.8 trillion) nationwide as of March, according to a report in the daily La Nación.

Several factors contributed to increased use of credit cards.

Before, credit cards were only for the more financially savvy consumers. Now, Céspedes said, plastic is pushed in a more democratic manner.

Competition has also increased among credit card issuers. Traditionally, credit cards are distributed by banks – both private and public – and by independent financial institutions, such as Aval Card and Credomatic.

But even major retailers, such as Librería Internacional, are getting into the game. Low interest rates also spurred spending on credit.

The past year saw a drop in average interest rates for debt in colones, falling from almost 17 percent to 14.5 percent from May 2007 to May this year. The dollar’s interest rate also dropped over the same period, from 10 percent to 9 percent.

As the average interest rate drops, so does the rate charged by credit card issuers.

Annual interest rates are not regulated by the state. A recent study produced by the Economy Ministry (MEIC) published going rates at various banks.

Banco Nacional’s Classic Visa card’s annual interest rate was 23 percent, while HSBC’s Standard Mastercard was 48 percent.

Compare that with Aval Card’s Visa Classic rate of 32 percent and Credomatic’s Classic American Express of 43 percent.

All rates are for debt accrued in colones. Nationwide, total debt on active credit cards rose by 55 percent from March 2007 to March 2008 – increasing from ¢14.6 billion ($28 million) to ¢22.6 billion, according to the Costa Rican Banking Association.

That debt could multiply in real terms should the colón continue to weaken against the dollar, as it did last week.

Market logic follows that banks and other financial institutions do not want to rein in clients’ spending habits. The greater the debt, the more profit they make through interest charges.

That is where the Superintendence of Financial Entities (SUGEF) steps in. The government agency sets banking standards and collects information on individual consumers under its CreditInformationCenter.

Banks provide information to CIC regarding clients’ credit history. Likewise, they can ask the center for information on a potential cardholder. The CIC assigns different risk levels to consumers ranging from Level 1 to Level 3 – with 1 being the best credit score possible – based on the past four years of financial transactions, according to CIC spokesman Cristian Vega.

SUGEF established a system of controls to protect those banks that choose to lend to clients with risky credit scores.

“If [banks] give credit to bad payers, …they have to keep more money in their reserves” to cover any potential losses, Vega explained. However, “the reserve is obligatory, even if the borrower is Level 1.”

Credit card companies, such as Financiero Uno-backed Aval Card and BAC’s Credomatic, are not supervised by SUGEF, nor do they exchange credit information with the state agency.

Instead, they check clients’ credit scores through private companies, such as Zero Risk and Teletech.

Maria Isabel Cortés, the banking association’s director, said clients sign a contract with the credit card issuer.

Signing the contract, she told The Tico Times, indicates that the client accepts the card’s conditions and intends to abide by them.

“More than a training, it’s about the responsible action of carefully reading the contract’s terms, before signing it, to know the scope of the acquired obligations,”Cortés said.



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