Swipe what you can afford to spend


Saturday June 13, 2009



CREDIT card issuers have received considerable flak from the public – from encouraging excessive spending to unfair fees or penalties for late payments and defaults.


The criticisms have become more vociferous on the backdrop of the current economic slump. 





Some feel that in trying times like these, with rising joblessness and disposable incomes being drastically cut, financial institutions can do their bit by reducing credit card charges to lessen the financial burden on consumers.


However, there are those who say the onus to manage debt rests entirely on the individual and as such, they ought to use credit cards in a more responsible manner. In other words, swipe only when one can afford to spend.


Agensi Kaunseling dan Pengurusan Kredit (AKPK) chief executive officer Mohamed Akwal Sultan stresses the importance for credit card holders to be responsible and prudent to avoid falling into the credit trap.


“Everyone must be aware that great responsibility comes with having a credit card. It is up to the individual to control his or her usage of the card,” he says.


MasterCard Worldwide vice-president and senior country manager (Malaysia and Brunei) Jim Cheah concurs.


“One golden rule which credit card holders should always remember is to be a master of their card instead of a slave to it. If it is used wisely, one can enjoy the benefits, hence it is important to be aware of your limit,” he says.





To Cheah, spending within one’s means is the best way to manage one’s finances and remain financially healthy.


Cheah points out that consumers will be able to make better, more informed financial decisions by understanding some of the fundamental principles about credit and banking.


“You will also be in a better position to plan your financial future while still enjoying the occasional indulgence,” he says.


Citing an example of how credit card debts can snowball out of control, Mohamed Akwal says it takes about seven years and four months to settle a RM10,000 debt if the credit card holder pays the minimum amount every month and does not use the card at all. Interest is expected to balloon to more than RM4,000.


A total of 86,110 consumers have passed through AKPK’s doors since its inception three years ago until April 30, 2009. Of the total, 60,023 came for counselling and 26,087 enrolled for its debt management programme (DMP).


To Mohamed Akwal, consumers must be aware of the terms and conditions, such as late payment charges, interest rate for amount outstanding and minimum payment, before signing up for a credit card.


“My advice is for consumers to read the fine print first. The cost of credit would be higher for credit cards as it is an unsecured debt, which carries an element of risk to banks,” he says.


Mohamed Akwal, however, declines to comment on whether the current charges are reasonable or otherwise.


On the success of AKPK’s debt management programme, he says about 99% of the agency’s recommendations are accepted by banks.


Consumers are also happy as AKPK helps them to come up with a fair programme to settle their debts, he adds. 





“This creates a win-win situation for banks and credit card holders. In certain circumstances, banks have even agreed to lower credit card interest rates to between 6% and 9% from a maximum of 18%.


“Some have even waived interest rates for certain cases such as those who have raked up huge bills due to health/medical problems and those with no ability to generate income due to special circumstances,” he says.


Despite the current economic slowdown, Mohamed Akwal expects only a marginal increase in the number of credit card defaulters this year.


“The increase will come mainly from those directly affected by the economic slowdown, for example, those laid off work and with reduced working hours.


“These people will have no choice but to use their credit cards more often and defaults will be more likely as they will have less or no income to service their debt,” he says.


According to Bank Negara statistics, the number of individual bankruptcies totalled 13,907 cases in 2008, of which Mohamed Akwal says about 10% consisted of credit card bankruptcies.


The good news is that the economic crisis will help curb consumer spending, with consumers being more cautious and spending within their means, Mohamed Akwal adds.


He says increased awareness of AKPK’s services via various advertising and promotion campaigns and events has resulted in more credit card holders turning to AKPK for help to manage their debt.


This lead to a 33.9% increase in the number of cases AKPK has received to 12,506 for the first four months of the year. Enrolment for the DMP has risen 44% to 4,927 for the period.


Mohamed Akwal also advises consumers who find it difficult to control their spending to look for alternatives to credit cards such as debit or prepaid cards as this method allows consumers to spend within their means.


A debit card is a payment card which is linked to the user’s bank account while a prepaid card has cash pre-loaded into it. Both cards also work as an ATM card.


Visa Malaysia country manager Stuart Tomlinson says the company has been working with its clients to help build awareness with consumers on what a debit card is and how it can be used.


“Credit and debit cards have complementary relationship in that they can be used for different purposes, thus providing consumers with a choice on how and when they use their own money and line of credit,” he adds.


Tomlinson points out that more Malaysians are incorporating debit cards into their lifestyle to help them manage their finances as evidenced by the more than one million Maybankard Visa Debit cards issued since the product’s launch last March.


Using a debit card is also a good way for cardholders to manage their account more efficiently as every ATM transaction and purchase will appear on their monthly statements.


Cheah and Tomlinson decline to comment on the unfair fees or penalties charged on credit card holders.