Sunday, November 2, 2008

Article: The Plastic Temptation

Sunday January 27, 2008
The plastic temptation

Easy to come by and easy to chalk up a huge debt. With credit cards within the reach of just anybody, the temptation to spend and then suffer is a growing cause for concern.

NOWADAYS, it is virtually impossible to step into a shopping mall or supermarket without being hassled by eager salespeople promoting credit cards.

Banks are even hiring telemarketers to promote their cards, with people complaining about being inundated with such calls.

Consumers Association of Penang (CAP) President S.M. Mohamed Idris says it is relatively easy to even own several credit cards these days as banks are competing to sign up as many cardholders as possible.

While the minimum age to apply for a credit card is 21, the qualifying income for a card is low at only RM18,000 per annum; before, it used to be RM24,000.

Most people don’t realise that at the 19.7% APR that represents the true cost of most credit card debt, it takes just under four years for a person’s unpaid borrowings to double in size« RAJEN DEVADASON

“Many have got into financial difficulties because of credit cards,” adds Idris.

Statistics obtained from the Credit Counselling and Debt Management Agency (AKPK) showed that 7,456 people had enrolled into its Debt Management Programme (DMP) as of October 2007 since it began its operations in May 2006.

Of this number, 31% got into financial trouble because of credit card debts. Another 52% faced a combination of hire purchase, housing loan and credit card debts.

Credit card debts as of October 2007 alone stood at RM21.6bil, with non-payment of credit card loans amounting to RM591mil, or at an NPL ratio of 2.7%.

While AKPK chief executive Mohamed Akwal Sultan says this figure is not alarming, CAP does not encourage the use of credit cards.

Rajen Devadason, a Certified Financial Planner (CFP), says banks are going all out to market credit cards because the interest rate banks are allowed to charge is the highest among conventional loans.

For instance, when a person is charged 1.5% a month on an unpaid credit card balance, the nominal rate he pays is 18% per annum, but because the interest is charged on a daily compounding basis, his true rate or his APR (annualised percentage rate) is 19.7%.

“Most people don’t realise that at the 19.7% APR that represents the true cost of most credit card debt, it takes just under four years for a person’s unpaid borrowings to double in size through snowballing interest,” said Devadason, citing a study carried out in the United States many years ago that suggested people tend to spend 17% more on any particular shopping trip if they were paying with plastic rather than cold hard cash.

“From a corporate perspective, for as long as banks are able to control their average ratio of credit card defaulters to sound credit card borrowers, and continue to keep that percentage as low as possible, the profit margin on their credit card business will remain very healthy,” he adds.

A bank manager who spoke on condition of anonymity says that banks have no choice but to be aggressive in their marketing as it is all about numbers.

“You need a big base. That is the only way you are going to entice the so-called bigger merchants to partner up with you. The bigger you are, the more preferred you become and that means more income.”

He adds that banks stand to gain a lot of commission from merchants, who are charged 3% of the purchase.

According to Alice Goh, Head of Cards, Cobrand and Alliance, Citibank Berhad, the credit card industry has been growing at a rate of 16% to 20% in the last few years.

“We believe that this will continue,” shares Goh, adding that the credit card business is one of the bank’s core businesses.

So banks are coming up with all sorts of offers to lure people into applying for credit cards.

They are also teaming up with various companies such as airlines, insurance companies and even petrol stations, offering rebates and discounts on many products.

Darshan Singh, the director of the National Consumer Complaints Centre (NCCC), believes there is nothing wrong with this although he urges banks to increase the minimum income required to get a credit card.

Goh, however, believes that RM1,500 is an adequate figure. She says that Citibank always looks at the customers’ current commitments prior to determining the credit line approved.

Mohamed Akwal Sultan, meanwhile, dismisses the perception that it is easy to obtain credit cards.

“The public might think it’s easy to get a credit card because they are always being chased in shopping complexes, but the reality is the guidelines are there.

“There is a thorough and rigorous process to get the first card. The second or third card might be easier to get but that also depends on previous payment records,” says Akwal, who advocates the use of credit cards.

Banks use the Central Credit Reference Information System (CCRIS) to check on an applicant’s financial history.

Problems occur when people are not well educated and only pay the minimum every month,” adds Akwal.

The Association of Banks Malaysia (ABM) executive-director Wong Suan Lye says that banks have to comply with guidelines on credit card issued by Bank Negara Malaysia.

“In growing their credit card base, banks are ever mindful of the credit risk involved. The evaluation criteria for a credit card tends to be stringent because it is an unsecured line of credit,” she adds.

Idris, however, says that banks are partly to blame as they are also tempting cardholders to get into debt because of the interest they can earn from it.

“Recently, one bank sent out RM5,000 cheques to cardholders asking them to cash the cheques. The bank is blatantly trying to get cardholders into debt. Cardholders who would not have bothered to apply for such a loan will be tempted by the offer,” says Idris.

Darshan adds that some banks seem to issue cards without people even applying although Goh claims that this is not a Citibank practice.

“We do not issue free credit cards to customers who have not signed an application as per the regulatory guidelines. At Citibank, we adhere to the standards set by the regulators as well as the internal policies,” she adds.

Wong says that an unsolicited card sent to someone need not be activated and should be destroyed immediately. “Then there is no liability on the part of the recipient.”

Another problem could lie in the salespeople who are selling the card without really educating the customer.

“Some of them don’t seem to know their product that well. Their only objective is to sell their card. People are misinformed and when they get into trouble, then they are left alone,” says Darshan.

If you are blacklisted by CTOS (Credit Tip Off Services Sdn Bhd) and CCRIS, your future is literally gone.”

He proposes that Bank Negara should look at this problem at policy level.

“We have received many complaints about the lack of information. People have had their bank accounts frozen and their salary deducted, leaving them stranded.”


plastic card said...

Credit cards have so many advantages but on the other side it has too many disadvantages. It ruins people who don't use it properly. But nowadays banks use telemarketers to promote their cards and bring awareness of how to use these cards among the people.

Pay off Debt said...

Credit Cards if not used in a right way may lead to terrible consequences. The debt keeps piling and given the current scenario people tend to reel under debt and later file for bankruptcy.

Anonymous said...

what if my card the avail credit left about RM300 can i still apply to this plan?
Did apply to increase credit limit but unsuccessful

Basir Agency said...

yes you can.
before you apply for CL increase, make sure your previous running 6-month payments were on-time, no overlimit, also ur overall credit performance are palatable.
better way, every friday, make payment.

Debt Negotiation Attorney said...

If there are some advantages of credit card, then there are some disadvantages too. Where it provides a freedom from carrying cash, it also leads to debt situations if not used carefully. However, there are many debt settlement companies, that have experts for solving such problems.

Debt Relief said...

If a person does not want to carry cash in his pocket, he feels it easier to keep the credit card, which has become an easy mode of payment, and sometimes spends lavishly with the help of it. Such a habit leads a person into a heavy debt situation and then they are stressed to find out the best way of getting rid of the credit card debt. Thus, it is better to maintain a balance between the income and the expenditure.