With the rapid development of the credit card industry in China, credit installment businesses of have become more popular recently. In terms of scale, the installment balance of credit cards accounted for 40% of credit balance payable at the end of 2018. In recent years, the annual growth rate of installment business of many banks was over 100%. Further, the income of installment business in 2018 exceeded one third of the total income of credit cards and accounting for the largest part of credit card income business. Banks’ active promotion of the installment business brought considerable income. Yet the bank advertising installment business slogan is "zero interest rate, low handling fee", which suggests an obvious paradox. How can low handling fees make credit card issuing agencies to obtain high income? What is the true cost of the installment business?
Credit card installment fees are essentially interest payments on consumer loans. Credit card instalments require payment of the same amount of principal. The loan principal decreases month by month, but the interest (instalment fee) remains the same. If a consumer pays in advance but pays the interest in full, the real interest rate is higher, even above the red line of 36 percent for private loans. For example, if a bank charges a monthly service fee of 0.6% for 12 instalments, which consumers intuitively expect to pay at an annual rate of 7.2% (0.6%*12=7.2%), the actual borrowing cost can be as high as 13.03%, which is less than the 18.5% interest rate on credit cards but nearly double the intuitive rate.
There are three reasons why credit card instalments have led consumers into the illusion of low costs：
First, commercial banks’ selective information disclosure and exaggerated publicity misleads consumers;
Second, regulators have not formulated a unified regulatory system for the disclosure of installment products. Therefore, it is impossible to effectively supervise relevant institutions and make them disclose the cost of installments to consumers so they can compare the real costs.
Third, consumers’ lack of financial knowledge makes it impossible to judge the cost of installment credit.
In order to resolve the misleading problems to consumers, several suggestions are provided below:
First, the real interest rate of installment business should be disclosed to protect consumers' right to know.
Second, the legal system should be improved, the information disclosure standards and standardization mechanisms should be improved. Disclose important information about products clearly in order to ensure that consumers do not choose wrong products because of misleading information.
Third, strengthen financial education, promote rational use of consumer debt and to help consumers to fully understand financial products and correctly assess their affordability.
