Journal of Finance, Accounting and Management, 6(1), 30-40, Jan 2015
30
Relationship between the Incentives Offered on Credit Card and its Usage
Asma Salman, Nauman Munir
College of Business Administration
American University in the Emirates
asma.salman@aue.ae, nauman.munir@aue.ae
Abstract
Credit card is a financial product and it is defined as, a plastic card having a magnetic strip,
issued by a bank or business authorizing the holder to buy goods or service on credit, also
called charge card. The paper is all about the credit card usage behavior and factors that are
affecting the usage of credit card. The main focus of the study is to find out the relationship
between the facilities that are offered on the credit card and intensity of using the credit card.
Besides it this study also focuses on that why people prefer to use the credit card and the other
determinants that are affecting the usage of credit card like, Hidden charges, and higher interest
rate. The survey is conducted in Rawalpindi region of Pakistan. The sample for this research is
credit card customers in areas of Rawalpindi. Unit of analysis is credit card customer (individuals). After the collection of data, it is analyzed by frequencies and correlation check to find
out the relationship between motives and hidden charges with the usage of the credit card. And
the results reveals that there is a positive strong relationship between motives/facilities and
usage of credit cart card. And there is a negative relationship between hidden charges and usage
of credit card. Hence, motives/facilities are positively correlated with the usage of the credit
card and hidden charges are negatively correlated with the usage of credit card.
KeyWords: Credit Cards, Unit Root Analysis, credit card usage behavior, hidden charges
Introduction
The use of credit cards originated in the United States during the 1920s, when individual firms,
such as oil companies and hotel chains, began issuing these credit cards to their customers.
Early credit cards include sales directly between the merchant offering the credit and credit
card, and that merchant's customer. Credit cards are also called “charge cards”. Around 1938,
companies started to accept each other's cards. Today, credit cards allow us to make purchases
with numerous third parties.
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Credit cards were not initially made of plastic. Previously there have been credits token made
from metal coins, metal plates, and celluloid, metal, fiber, and also paper. The inventor of the
first bank issued credit card was John Biggins from the Flatbush National Bank of Brooklyn in
(New York). In 1946, he initiated the "Charge-It" program between bank customers and local
merchants. The simple procedure was that merchants could deposit sales slips into the bank
and the bank billed the customer who used the card. A credit card allows consumers to purchase
products or services without cash and to pay for them at a later date and up to a predetermined
credit limit. Every month credit card companies or banks provide a bill, which tallies the card
activity during the previous 30 days.
In other words, whatever you charge to your credit account has to be paid back within the credit
cycle or an interest amount will be applied to the remaining balance. It is a loan that you take
from the bank or from the lender company. This facility provides us to buy first and pay later,
but paying it back later on is must. In Pakistan Credit Cards evolved with the introduction of
credit cards by Habib Bank, when it launches the gold card which was not popular among
people. After that Allied bank’s comes with Master card which gets huge success among the
customers, then different banks come up with their different form of credit and debit cards.
Credit cards gained popularity in Pakistan, however, only in the 1990s when Citibank launched
its Citibank Pakistan Visa Card. The major banks who are currently offering credit cards in
Pakistan are Allied Bank, Habib Bank Ltd, Muslim Commercial Bank, United Bank Limited,
Standard Chartered Bank, Alfalah Bank, Askari Bank limited, Barclays, Meezan Bank and
Emirates Bank International etc.
Objective of the Research
To gather an insight of the public’s level of understanding about cardholding and the way they
use cards. To investigate the customers’ beliefs about the usage of credit card and also under
what circumstances the people prefer to use the credit card. The consumption patterns of credit
card usage by Rawalpindi’s Pakistani credit card holders and how motives and facilities increase credit card usage will be determined.
Journal of Finance, Accounting and Management, 6(1), 30-40, Jan 2015
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Significance of Research
In today’s world the roles and importance of credit cards is clearly significant. The credit card
users can spend future’s money today. There are no barriers for the users to spend in any currency since shops and stores only concern whether the cards are useable worldwide or not.
Customer’s perspective is focused during this research because it aims to find out what are
customer beliefs, opinion and experiences with regard to the usage of credit cards in Pakistani
community.
Therefore keeping in view the importance and popularity of this mode of payment, this research
will reveal Pakistani customers usage behavior regarding credit card. It will provide knowledgeable content for issuers as well as holders to operate and utilize this facility more effectively.
Scope of the Study
The results of this research will be generalized for banking sector (who deal in business of
credit card in Pakistan).It will help credit card issuers to position right target market by knowing that what actually customers have in their mind about credit card usage.
Problem Statements
What is the relationship between the motives/facilities offered on the credit card and hidden
charges with the usage of credit card.
What are basic determinants of credit card usage behavior and how their impact?
Literature Review
Wickramasinghe and Gurugamage (2009) explored credit card ownership and usage practices
in Sri Lanka in order to understand the relationship between credit card ownership and usage
practices with respect to demographic and socioeconomic characteristics of credit card users.
In this study, eight demographic and socioeconomic characteristics of credit card users were
investigated, namely, age, sex, marital status, the level of education, the number of dependents
in the family, monthly income, the length of credit card ownership and credit card debt ceiling.
Likert scale was use. For the Sample of 177 credit card holders a structured questionnaire was
developed. It was found that respondents have few broad motives for using credit cards including; Credit cards serve as a payment device in place of cash, Communication programs of credit
card lenders also motivate potential customers and finally credit cards is used as a mode of
short-term Financing. Demographic findings explained that the females tend to pay medical
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expenses more than males. Single personnel’s tend to pay more for eating out/entertainment
than married respondents. Highly educated respondents spend more on utility bills and mortgage while less-educated respondents spend more on eating out/entertainment.
Plummer (1971) provided insights into the differences existed between users and nonusers of
commercial bank charge cards along "life style" dimensions. A sample of 1,000 representative
female homemakers and a separate sample of 1,200 male heads of households were utilized for
research by survey questionnaire method. Finding of the study showed that higher income,
better-educated, middle-aged, and professional segments were more prominent users of commercial bank credit cards. Both the male and female user indicated a convenience-orientation
toward credit cards as a satisfactory cash substitute.
Hogarth, Hilgret and Kolodinsky (2004) studied about the credit card exit or leaving behavior
as a result of problems. Sample of 1500 credit card users was taken and questionnaire was
circulated among them. Findings showed that exit behavior was high among those whose problems remained unsolved. Whereas price of credit card services, access to substitutes and level
of dissatisfaction are primary reasons of exit behavior among credit card users.
Madiha, et al (2009) studied that what factors contribute towards the choice of a credit card
and what were the different motives behind carrying multiple or single credit cards. Survey
was conducted through questionnaire and descriptive statistics was used to show the results.
Perceived uses of credit card highlighted that ease of carrying card instead of hard cash was
one of the prime motives to use a credit card. Factors that determine choice for a credit card
mainly rely on credit card limit followed by the power of logo on the card (visa/Master) and
image of issuer bank. Most people who are in the age bracket of 15-35 years carry multiple
credit cards so they are users. The major reason to carry multiple credit cards included more
credit line options and different schemes offered by banks to buy products through special
installment arrangements like cell phones, TV's, Air conditioners etc.
Jaffery (1995) studied the objective of the study was to examined the utility of plastic cards
and evaluated it in the framework of socio-economic conditions of Pakistan. For Pakistani customer reason of using card included less need to carry cash while shopping, Payment in the
form of installments and availability of cash on holidays and during off hours without the need
to carry a cheque book. According to estimate, more than 50% of the cardholders tended to pay
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their bills in full within the prescribed time limit. Chakravorti and Emmons (2003) examined
that credit cards was rapidly growing part of the retail payments and consumer finance system.
However, more recently, credit-card acceptance has increased and includes more competitive
industries. Keeping in view this, a model of credit-card network was developed that explored
the relationship of retailer, bank and customers of credit cards. The article reveals out that the
annual fee paid by revolvers as well as convenience users were relatively small portions of a
credit issuer’s revenue, amounting only to 1.9% (Credit Card News 1999).In reality, card issuers compete on finance charges, card enhancements, annual fees, and other fees. So if they
want their customers to retain with them they should charged low annual fee and finance
charges Issuers always try to convinced customers that card was free of any other hidden
charges because most customers keep very limited usage of credit card due to fear of hidden
charges.
Theoretical Framework
The dependent variable in the theoretical framework of this research is Usage of credit card.
Schematic Diagram
Motives
Credit card usage behavior
Hidden
Charges
Independent
Dependent
Research Methodology
This study is focused on finding out the level of usage of credit card in Pakistani community,
and what are the factors that are affecting the usage of credit cards by the customers. Data is
collected from credit card customer from real world locations including market places, banks
and so study setting is field. The sample for this research is credit card customers in areas of
Rawalpindi. Unit of analysis is credit card customer the data is collected from a sample of 30
respondents. The research is based on some primary data. It is collected by questionnaires.
Secondary data sources include articles, Research papers, and websites. Questionnaires were
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filled from credit card customers who visit time to time in banks credit card department, located
in Rawalpindi. Primary data is measured by the dimension of usage frequency. On the other
hand two independent variables in this framework are Motives and facilities offered to Customer (including convenience, status symbol, universal acceptance, reward incentives, credit
limit), Hidden Charges.
First independent variable is motives and facilitation. It checks out the importance of motives
due to which credit cards have an upper hand on cash. Then a second independent variable
Hidden charge is studied with the view that do customers have fear in their mind about these
charges or not and how this fear will affect usage of credit card.
Data Analysis and Discussion of Results
In this research primary data is collected through survey methodology. For this purpose a structured questionnaire is floated in 30 Credit card customers. Finally data obtained is analyzed by
using frequency tables, graphs and for checking the relationship between independent and dependent variable correlation is used. The results revealed that incentives/Motives are positively
correlated with the usage of credit card. Increases in the incentives allow them to use the credit
card more while decrease in the incentives allows them to use the credit card less. While hidden
charges are negatively correlated with the usage of credit card. Increase in the hidden charges
allows them to use the credit card less while decrease in the hidden charges allows them to use
the credit card more. See Tables 1. – 14. for complete descriptive statics for the study.
Table 1: Correlation
Usage
Motives
H.charges
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Usage
1
30
.404(*)
.027
30
.056
.770
30
Motives
.404(*)
.027
30
1
30
-.044
.817
30
* Correlation is significant at the 0.05 level (2-tailed).
H.charges
.056
.770
30
-.044
.817
30
1
30
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Table 2: Credit card is a status symbol
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
12
40.0
40.0
40.0
Agree
18
60.0
60.0
100.0
Total
30
100.0
100.0
Table 3: Credit card helps when you are in need of immediate money
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
3
10.0
10.0
10.0
Agree
22
73.3
73.3
83.3
Neutral
5
16.7
16.7
100.0
Total
30
100.0
100.0
Table 4: Credit card used for more than 1 and less than 5 years
Valid
Frequency
Percent
Valid Percent
Cumulative Percent
Agree
23
76.7
76.7
76.7
Neutral
7
23.3
23.3
100.0
Total
30
100.0
100.0
Table 5: At places like restaurants, travel services, utility bills and online shopping do you prefer to pay through the credit card rather than cash
Valid
Frequency
Percent
Valid Percent
Cumulative Percent
Agree
6
20.0
20.0
20.0
Neutral
24
80.0
80.0
100.0
Total
30
100.0
100.0
The results of study can be utilized by credit card issuers in order to better position and target
credit card market.
Table 6: Credit Card because you are moving in a society
where it is considered an essential element
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
2
6.7
6.7
6.7
Agree
21
70.0
70.0
76.7
Neutral
7
23.3
23.3
100.0
Total
30
100.0
100.0
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Table 7: The nature of your profession allows you to use the credit card
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
3
10.0
10.0
10.0
Agree
24
80.0
80.0
90.0
Neutral
3
10.0
10.0
100.0
Total
30
100.0
100.0
Table 8: Incentives like low interest charged or more credit limit or any reward
increase your credit card usage
incentives,
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
24
80.0
80.0
80.0
Agree
6
20.0
20.0
100.0
Total
30
100.0
100.0
Table 9: The more facilities offered to you on credit card the more frequent
you will use your credit card
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
25
83.3
83.3
83.3
Agree
5
16.7
16.7
100.0
Total
30
100.0
100.0
Table 10: More credit limit offered by the bank on credit card, motivates you
to use or spend more
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
2
6.7
6.7
6.7
Agree
26
86.7
86.7
93.3
Neutral
2
6.7
6.7
100.0
Total
30
100.0
100.0
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Table 11: Fewer facilities that will offer to you, you will use the credit card less
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
22
73.3
73.3
73.3
Agree
8
26.7
26.7
100.0
Total
30
100.0
100.0
Table 12: Due to fear of hidden charges you prefer to use cash/ATM,
instead of credit card
Valid
Strongly Agree
Frequency
24
Percent
80.0
Valid Percent
80.0
Cumulative
Percent
80.0
Agree
6
20.0
20.0
100.0
Total
30
100.0
100.0
Table 13: Increase in the interest rate leads you to use credit card less
Cumulative
Valid
Frequency
Percent
Valid Percent
Percent
Strongly Agree
22
73.3
73.3
73.3
Agree
8
26.7
26.7
100.0
Total
30
100.0
100.0
Table 14: Frequency Table
Customer Perception
Questions
1
2
3
4
5
6
7
8
9
10
11
12
13
N=30, Valid = 30
Mean
1.6
2.07
2.23
2.80
2.17
2.00
1.20
1.17
2.00
1.27
1.20
1.27
2.07
Median
2.00
2.00
2.00
3.00
2.00
2.00
1.00
1.00
2.00
1.00
1.00
1.00
2.00
Mode
2
2
2
3
2
2
1
1
2
1
1
1
2
.498
.521
.430
.407
.531
.455
.407
.379
.371
.450
.407
.450
.521
Std Deviation
Conclusion
Following recommendations are drawn from the study for the issuers of credit cards the customers to increase credit card usage. Demographic differences bring wider variations in usage
practices and consumption patterns portray usage patterns of credit card customers. Issuers
should target markets while keeping demographics and consumption patterns as major factor
for selection of such markets. Incentives or reward offers increases the usage of credit card
Journal of Finance, Accounting and Management, 6(1), 30-40, Jan 2015
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therefore banks should offer it to customers by time to time because these facilities will motivate Make clear in minds of customer that no hidden charges are in credit cards so that usage
of credit card could be increased.
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