It has been several months but I kept digging about this issue as I wanted to understand about this as much as possible. Here is a story I found which at least gives me an analogy to explain this situation to my fellows. Author of this story is unkown.

Econ 101 Heidi’s Bar – Bailout Scam

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets.

Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts.

Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities.

They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from their cronies in Government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Heidi’s bar.

Now, do you understand?

Ok here are figures, solve this puzzle what rate they applied. Outstanding balance for the month of November was:  PKR 46,843 , I have paid PKR 42,000 on due date and check of remaining payment was never dropped (forgot!) so outstanding balance was about PKR 4000 , and today i received this statement with almost PKR 2000 as finance charges. Wow only for one month it is about 50% for the payment. Which mean annually it would be 50*12= 600% for the year!

LOL impossible! I called their call center and they dropped a BOMB on my head and I got to realize how great this credit card banking business is!

He shared with me few things which were completely NEWS to me:

1. When you do not make FULL payment , every cent, it is called partial payment, and it does not matter you may 10% or 90%. Finance charges is calculated to FULL payment, not the outstanding balance! So while i was thinking they will calculate charges on outstanding balance PKR 2000, at the same time the banker was calculating the interest on the full payment of the month.

2. Also interest rate is calculated on each transaction daily, from the date of transaction to the date when the whole balance for that month will be paid. So it gets really worse.

Now after knowing these above two facts I came to realize how many close dear friends of mine got into Credit Card debt hell. It was the smart banker! But i do not blame only the banker, as we should take full responsibility of our acts. As we have signed and agreed T&C with the banker and we are using his money for the full month without any charges(if paid on time.)

If i knew the above facts before the due date, I would have made sure to make the full payment. I thought as we have paid almost 90% of the outstanding , very nominal charges would be due to us. But this is totally different world. I am posting this on my blog to make this the part of the record so you and I can be careful for the next credit card payment.