Living in the red

While interest on loans is declining steadily, low interest rates mean it doesn’t pay to keep money in the bank. Thus, the current trend is to live on debt.

Pavel Juřík

During the last two years banks’ relations with ordinary clients who don’t need to borrow tens of millions of crowns or don’t have similar sums of cash on hand have changed radically. While a client requesting “only” a loan for a new car, a vacation, or a living room suite was unwelcome in banks ten years ago, today he has become the center of attention.
This lucrative segment is attractive to the banks, as well as many finance companies, the three largest of which – Multiservis, Home Credit, and Cetelem – last year earned over CZK 10 billion. Universal products that make permanent indebtedness possible are increasingly popular. “Client interest is quickly shifting from consumer loans to more flexible credit cards,” says Jiří Pathy, head of GE Capital Multiservis, the largest finance company. “Over the next four years the Czech market has the potential for another 2.5 million credit cards,” adds Pavel Juřík, a payment systems specialist for Bull. So far finance companies and banks have issued nearly 1 million cards. The opportunity to go into debt so easily brings with it the risk of credit misuse, and requires banks and finance companies to protect themselves against possible fraud. That is one reason why such practices as credit registers are currently being set up (see sidebar p. 58).
Western Europe recently went through a development that we can expect here. In the nineties, the invasion of American finance companies with individualized credit cards and consumer loans, accompanied by aggressive marketing and addressing clients, bore fruit in the form of decent market shares in the UK and France. The American harbinger that will soon be followed by others, is the Household bank, which has opened offices in the Czech Republic and Hungary this year. The Czech branch, under the Beneficial brand, began offering consumer credit loans at the end of June, and plans to introduce credit cards later.

Pavel Ráliš

Enticing credit cards

Credit cards are currently going through the greatest boom. This spring alone the options have practically doubled, to over a dozen offers. Why is this noteworthy? If you pay with an ordinary payment card in a shop or restaurant or take cash from an ATM the transaction will be immediately deducted from your account. Conversely, a true credit card is not tied to the balance in your account at all. You can spend with it all month and then you will have another two or three weeks without interest to pay for your purchases through a simple bank order or a postal money order. In other words, you can live on your debt for an entire month without paying anything extra for it.
Credit card issuers use this interest-free period to attract new customers. Most people expect to pay everything off each month, and to save money thanks to needing less in their accounts. Unfortunately, on average, two-thirds of credit card holders will sooner or later start drawing on their credit, and that’s not cheap – with most credit cards the annual interest rate ranges between 19% and 26%. The advantage of loans against credit cards is that you determine the size of your installment payments yourself, but you do have to send the bank at least one-tenth of the amount owed each month.
Obtaining a credit card takes about a month, and anyone with an average income can get one with a monthly limit of CZK 20,000-30,000. The largest credit card issuers are Citibank and HVB Bank, but all of the larger banking houses already offer them as well. Non-banking issuers include Multiservis, CCS, and Home Credit, among others. One final bit of advice: never use a credit card to take cash from an ATM, because you will be charged interest immediately.

The mysterious RPSNSINCE January 2002, a law that orders providers to publish the true prices of their loans has been in force. The price of loaned money is designated by the abbreviation RPSN. These four letters mean Annual Percentage Rate of Costs. The rate covers not only interest on the loan, but also all other costs connected therewith. Look around carefully in the shop or bank, or just ask. Every shop or bank is obligated to inform you of its RPSN. Thanks to RPSN, you can easily compare competing offers.

Consumer loans: who’s giving them?

You don’t have enough cash or a credit card just now, and you’ve seen an offer that strikes you as excellent. You probably need to apply for a consumer loan. At first glance loans from finance companies appear inexpensive – you make ten installment payments (the most common loan product) and pay only an additional 10%. But look out – that one tenth, converted to annual interest, is no longer just one tenth. When you add on fees for closing the contract, for maintaining the loan, or for statements, your annual interest rate can exceed 30% (see sidebar).
Consumer loans offered by banks are up to 50% cheaper. The best of them charge just a bit over 10% per annum. “Finance companies don’t know their loan applicants’ histories as well as the banks do, so they must reflect their higher risk in their prices,” explains Pavel Ráliš, the marketing director for CCB Credit, one of the finance companies currently jumping into the market. The greatest disadvantage of bank consumer loans is the long time it takes to set them up. However, if you have at least a slightly above-average salary, you’re over 25, and your commitments aren’t too great, it should be no problem to take out a loan of up to CZK 100,000.
The saying that time is money applies especially to consumer loans. While you can arrange a loan from firms such as Home Credit, Multiservis, and Cetelem right in a shop in just a few minutes, the relatively lengthy process in a bank has the advantage of lower interest payments. However, the arrival of new players and the rapid development of credit cards are forcing finance companies to offer their loans at competitive interest rates.
Thanks to this competition, all types of loans to individuals will very soon become more affordable. Certainly good news for those of you who are able to make proper use of loans in your family budget.

Credit registers – a way to keep debtors in lineCREDIT REGISTERS are common around the world, making it possible to provide banks with basic information primarily on a loan applicant’s possible debts and payment history, so as to better calculate loan risk.
Two debtor registers will soon be available in the Czech Republic. Since the beginning of June, five banks have offered a Common Loan Register for Individuals. Member banks of the Czech Banking Credit Bureau association that operates the register are Česká spořitelna, ČSOB, GE Capital Bank, HVB Bank, and Komerční banka. At the beginning approximately 1.5 million bits of data on 900,000 clients will be available. Another eight banks and are expected to join them later.
The second register is being prepared by the Czech National Bank along with the Czech Banking Association. The register went into trial operation at the beginning of May under the name Central Register of Loans. The Czech Republic is one of the first countries in central and eastern Europe to have such a register, which will be loaded with data compiled on business subjects. The only country in this region with a functioning register is Poland, and preparations are underway in Slovakia.

Which account is most advantageous?This spring the banks changed their service fees. In fact, they raised them, and not just a little. How can you find a way to pay minimal fees? Where is the best place to open an account?

Dušan Hradil
Photo: Vl. Weiss

Although banks are making every effort to encourage clients to make cash-free payments using cards, Czechs still love cash. However, these habits will soon change, especially since the fee hikes have made it cost over CZK 30 to withdraw cash from an ATM. With the exception of Citibank and HVB, all banks now charge various fees for cash withdrawals depending on whether you use your bank’s ATM or one of the competition’s. Some banks offer two to four withdrawals without any fee, but that generally applies only to their own machines. Another catch could be the charging of a so-called accounting entry for each transaction. So check to see whether there are any other items hidden in the service fee list that relate to cash withdrawals! For clients this means thinking through whether to use another bank’s nearby ATM or to walk around in search of “their own” machine, which can save even more than twenty crowns.
You could, of course, find a bank with lower fees, or alternatively set up another account solely for cash withdrawals with the bank with the lowest fees. Unfortunately, your new “ATM account” will also charge you for keeping the account and issuing statements, as well as accounting entries for money deposited and ATM withdrawals. Except for Česká spořitelna, which owns half – nearly 1,000 – of all ATMs, the other banks’ networks are substantially smaller. Taking fees and the sizes of ATM networks into account, the best choices for personal accounts seem to be Raiffeisenbank, Živnostenská banka, and Česká spořitelna, to a degree.
Better (cheaper) times are not at hand, but there are no plans for fee hikes any time soon. All you can do is use your calculator to add up fees, and to mark “your machines” on a map, or to set up another account, or, finally, to do as your bank says, and start paying for everything by card.

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