Saturday June 13, 2009
By DALJIT DHESI
Less than a month ago, US President Barack Obama signed sweeping credit card reforms into law to shield American credit card holders from predatory fees, among others. With mounting credit card debts and a tough climate, could now be a good time for Malaysia to consider similar reforms?
SITE supervisor Joe Manikam, 31, was retrenched from a multinational company last year. To make ends meet, he used his credit card to manage certain expenses while scouring the job market. He struggled for 10 months and ended up doing odd jobs. He now spends sleepless nights worrying about how to settle his credit card debt which has burgeoned to unmanageable levels while he struggles to settle the minimum charges.
Worryingly, Manikam is not the only one who has been using credit cards as a temporary crutch during these hard times and found himself caught in a long-term trap of credit card debt.
Think about it – a total of 33,361 people have found themselves out of work (retrenched) in the country from Oct 1, 2008 to May 7, 2009. A further 42,884 have been temporarily laid-off or have suffered pay-cuts. This data may not be exhaustive as it only takes into account those who have registered with the Human Resource Ministry. And there’s little to indicate that the rise in jobless rate may halt any time soon.
For many of them, living from pay-cheque to pay-cheque or on their hard-earned savings, the debt burden could have suddenly turned insurmountable. Some desperate ones have given in to the lure of loan sharks while many others have sought counselling.
Card woes – a global phenomenon
Agensi Kaunseling and Pengurusan Kredid (AKPK), a counselling unit under Bank Negara, says the bulk or two thirds of those seeking help to resolve debts have credit card headaches. And the root cause for 22% of their woes is poor debt and credit card management.
This is not a problem that is Malaysian-centric. Even the generally-perceived to be thrifty South Koreans found themselves crushed by debts which far exceeded their annual income a few years ago as the plastic card became more widely used.
In fact, in the United States and Europe, the use of “plastic money” is even more widespread.
A few years ago, the Bank of England revealed that Britons owed an astounding £1 trillion in consumer debt including credit cards and estimated that this debt was rising by £1mil every four minutes.
In the US, credit card debt has risen over 25% in the past decade with an average balance over of US$7,000. Over half of Americans carry a balance every month.
One in five Americans carries a credit card balance at an annualised rate of over 20%.
To put a lid on this worsening debt situation, US President Barack Obama recently signed a law that brings a sea change to American credit cardholders which he described as “common sense reforms to protect consumers”. Among others, the new legislation forbids rate increases on existing balances (unless late payment are of at least 60 days or the initial rate was a promotional rate), prohibits fees for payment processing and restrictions on issuance of cards to people under 21 years of age.
Economists lay part of the blame on these credit card woes squarely on governments who have long been pushing private consumption to drive economic growth, particularly in Asia post the 1998 Asian financial crisis.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says there has been an explosive growth in the amount of credit card usage since the new millennium. There is data to prove that. The number of cards in circulation for primary holders more than tripled to 9.67 million units as of March this year from merely 2.92 million seven years ago. In addition, the credit line for card holders more than quadrupled to RM103.8bil versus RM24.3bil in January 2002.
“Such a phenomenal growth suggests that Malaysian consumers are becoming more dependent on credit in their consumption behaviour. It also implies that banks have been aggressive in expanding their credit card business as the consumer segment becomes their primary focus.
“This is due to the fact that the consumer segment is less risky compared to the corporate sector,’’ he adds. Against that backdrop and not surprisingly, Zahidi points out that the value of purchases through credit cards as a percentage of gross domestic product has surged from 3.5% in 2002 to 7.6% in 2008.
To unravel the rising burden of credit card debt, one needs to understand the fee structure, which can prove to be onerous for the layman.
Banks impose various charges on credit cards holders – joining fee, annual fee, finance charges (interest charges), cash advance fee and penalty or late payment charges.
Many are not aware that their credit card debt is risky until it reaches crippling proportions.
Did you know that if you had an outstanding balance of RM1,000 and you were simply paying the minimum monthly charge of 5%, it would take you five years and eight months to settle the total debt and over and above that, you’d be paying RM382 in interest based on an interest rate of 18% per annum?
Then also know this – the four-figure debt as it stands now and if not settled completely, could also easily rise to a five-figure one within years.
Great Vision Advisory Group head of tax and financial planning Datuk Chua Tia Guan shares the experience of a friend who spent RM5,000 a month via his credit card but just makes the monthly minimum payment of 5%. Twelve months later, Chua says that although in total he had paid RM17,000, he found himself owing the credit card company almost RM50,000, based on an annual interest rate of 18%! To add salt to injury, he had to borrow to pay his credit card debt, which of course, only served to exacerbate his indebtedness.
Then, there is also the lure of free transfer of credit balances to another card which financial institutions tout all with the aim of gaining a bigger market share in a bitterly competitive industry. This facility essentially allows a card user to transfer his outstanding balance to a new credit card account and ups his credit limits.
Chua explains that this facility does not solve one’s debt woes. In fact, he says, it further compounds the situation as interest is not only charged on the principal amount borrowed but also on interest charges carried forward from previous months.
The root of the debt
As at end of last year, total outstanding credit card debt owed by Malaysians stood at RM23bil. As at April this year, the figure was RM22.13bil.
Effective March this year, the interest rate on outstanding credit card balances was reduced between 0.5% and 1.5% while late payment fees was slashed to a minimum of RM5 (from RM10) and a maximum of RM75 (from RM100).
The interest rates for “Tier-1” credit cardholders, defined as those who promptly settle their monthly minimum payments for retail purchases for 12 consecutive months, will be reduced to 13.5% per annum from the current 15%.
“Tier-II” cardholders, who promptly settle their minimum payments for 10 months or more in a 12-month cycle, will see their interest rate reduced by 1% to 16% per annum. The interest rate for others has been fixed at 17.5% per annum, a drop of 0.5%.
Licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd describes the interest rate on outstanding credit card balances as relatively high, despite the recent reduction. He suggests that the rates be slashed further to a fairer rate of 10% per annum to reduce the burden on consumers.
Similarly, he calls for the cash advance fee, which is currently at 5% (of the amount advanced via electronic means or cheque issuance) to be lowered to 2% (it was around this level in 2000 and was subsequently raised).
He says that even with the reduction in late payment charges, if annualised, is still a hefty burden for consumers. For late payment fee, he recommends doing away with the minimum of RM5 and pegging the rate charged at 0.5% of the total amount outstanding, subject to a maximum charge of RM10. What makes it harder to stomach is that penalty is charged, not on the minimum amount to be paid, but on the total outstanding balance.
In addition, other than the late payment fee charged, a finance charge will be incurred by the cardholder when payment is made after the due date.
Some groups have described these charges as punitive and instead, call for the waiver of the interest charges for as long as the limit is not breached.
Lawyer Leong Yeng Kit of Leong Yeng Kit & Co says the high default fees and penalty interests are not unfair. After all, credit cards, he says, are not long-term loans. “They are meant to be short-term bridging loans until the paycheck comes,” he says.
He says it is crucial for card holders to fully settle their bill at the end of each billing month. That way, credit card issuers will not be able to charge interest on consumers but profit solely from sales commission from the vendor.
But should the charges be reduced?
“The card companies won’t go for it. They will suffer losses in an environment of increasing defaults and uncollateralised credit. There is great cost involved in recovery of funds from defaulters and write-offs from bad debts which is funded from the fees and penalties charged,” he says.
Moreover, he says, lower penalties and fees may only encourage consumers to spend beyond their means.
The Association of Banks in Malaysia (ABM), in response to StarBizWeek’s queries, says: “If a customer opts to promptly settle his outstanding balance in full, the customer will not be required to pay any charge.
“Late payment charges are only applicable to customers who make payments late and serve as an encouragement for customers to meet their regular monthly repayment obligations as well as to cover the banks’ cost in recovering overdue payments.”
The association describes the charges as “justifiable” based on the premise that credit cards provide “ease of payment at over 28 million merchant outlets around the world as well as flexibility to pay anywhere between 5% and 100% of the bill.”
MAAKL Mutual Bhd licensed financial planner Rajen Devadason points out that of the over 10 million credit cards issued to Malaysians, only 30% pay their balance in full every month. He says that studies reveal that a consumer with a credit card is likely to spend 17% more than someone using cash.
Interestingly, debit cards are slowly gaining popularity as an alternative to credit cards because they do not unnecessarily inflate consumers’ debt as they restrict consumers from spending more than what they have in their bank accounts.
However, Devadason says debit cards do not have the elements of purchase protection and insurance that credit cards have.
Still, they have chalked up good growth numbers. In 2008, transactions with debit cards rose 74% given the increase in number of retail locations that accept debit card payments.
Dissecting the agreement
How many of you have actually taken the time to pour over the details and terms of a credit card contract? Chances are, not many.
That’s largely because the agreements can be lengthy and riddled with legal jargons enough to put one off reading them. For the average layman, it may be especially hard to decipher what he is signing for.
As a solution, financial institutions should provide a summary of major terms and conditions in simple “layman” language, in particular the aspects related to usage and acceptance of card, payment, fees and charges, lost/stolen card including its liabilities (inclusion and exclusion).
Financial institutions should also explain the finance charges and qualification for entitlement of 20-day interest free period to consumers in an enclosed notification upon card delivery.
Chua also calls for the removal of the “declaration section” in the contract which allows banks to disclose information on the consumer to third parties.
Consumers Association of Penang president S.M. Mohamed Idris says it is unjust to include a clause that allows a bank to transfer monies from the cardholder’s accounts to pay off the credit card debt (if it is within the same bank) without the cardholder’s prior knowledge.
“One complainant was shocked to discover that his housing loan was not being paid because money from his savings account was being diverted to pay his credit card debt,’’ Idris says.
In its defence, ABM stresses that the words in the agreement are simple and clearly stated and that cardholders are free to contact the relevant bank or the association for clarification. The association says the excuse of consumers that “I did not read nor understand” must not be encouraged.
Still, regardless of whether or not the terms of agreement are understood, credit card debt is piling up.
And while there are mixed views on who should be blamed for this worrying trend and even though, ultimately, it is the individual’s responsibility to manage his or her own debts wisely, it may be high time that certain cracks in the structure of the country’s credit card industry be filled to lessen the chances of consumers slipping further into this quagmire of debt.