Tame the demon of credit card debt

The rate of credit card defaults in Malaysia may not be anywhere near dangerous levels, but it would be sheer folly not to heed the signs of financial distress that it points to among a section of consumers.

As the latest Bank Negara Malaysia (BNM) data on credit card spending shows, some RM70.1 million in credit card debt had not been paid for six months or more as of October 2010 (see table). The amount seems quite small in comparison with the total current outstanding balance due from cardholders, which stood at RM26.80 billion at the end of October 2010.

However, there is more to the situation than meets the eye. Firstly, the figure for October 2010 is RM8 million more than that for December 2009, indicating that a higher number of card users are unable to roll their finances over and have given up servicing their credit card debt. Secondly, the current outstanding balance in December 2009, which stood at RM24.28 billion, was RM2.52 billion less than the figure for October 2010.

Two things are significant about this growing credit card debt. The maths indicates firstly that more people are using their credit cards to finance their lifestyles, although the data does not show how much goes towards paying for essentials and how much is spent on luxuries. That would be important to know in order to understand what the debt pile says about the financial health of wage earners nationwide. For instance, over a quarter of consumers seeking help from BNM’s credit counseling service report that their debt burden became unsustainable when they had to seek medical treatment for themselves or their family members.

The second inference is more worrying. The higher amount of outstanding balances shows that the government’s attempt to rein in credit card spending has failed to produce the intended results. In Budget 2010, a RM50 annual service tax was imposed on principal credit cards and RM25 for supplementary cards to discourage the excessive use of credit cards, and so to prevent consumer debt from growing to unsustainable levels.

It is true that as a result of the tax, the number of cards in circulation registered a drop of 2.1 million between December 2009 and October 2010. The amount of credit extended also eased by RM2.06 billion from RM115.87 billion at the end of last year.

However, despite the lower number of cards in circulation and the concomitant reduction in credit extended, credit card spending has escalated in the past 10 months, and with it a growing number of card holders are unable to service their credit card debt.

In October 2010, the amount in overdue balances, from less than three months to more than six months in arrears, stood at RM2.55 billion, equivalent to a tenth of the total current outstanding balance. In December 2009, the figure for payment defaults was slightly lower, at RM2.42 billion.

Even if the service tax has not curbed credit card usage, however, it is not a total loss. At least, the tax revenue accrues to the government. The issue therefore appears to be a matter of fine-tuning the regulation of credit card usage. A long standing criticism of the regulatory regime is that the eligibility requirement for applicants of credit cards has been set too low. Currently, an annual income of RM30,000 is sufficient to qualify for a card. This, it has been argued, is an invitation to financial disaster.

A more effective strategy to curb credit card dependency, some analysts have pointed out, is to impose a surcharge on card usage, so that the more one spends the costlier it is for the card user.

For the low income earner with limited or perhaps no disposable income, the lifeline that a credit card appears to give him, turns out in fact to be a trap which eventually leaves him unable to service the financing charges that pile up when he pays just the minimum amount due per month. How the authorities can allow this situation to continue, where the poor end up putting their finances into jeopardy is a question that boggles the mind.

The inequities that result from credit card dependency among the middle and lower income group, stemming from usurious interest rates and late payment charges must rank among the most unconscionable forms of oppression that the modern economy has produced, along with the Third World debt burden and the undermining of traditional economies by neo-liberal trade rules.

Although the credit card debt situation in the country is in no apparent danger of turning sour in a hurry, it may be useful to draw some lessons from the consumer credit crisis that is threatening to come to a head in the US and elsewhere in the developed world.

In the US, particularly, where domestic spending accounts for some 70% of the GDP, the economic contraction that was brought on by the bursting of its property market has had a strong impact on credit card spending. For perspective, consider that in 2005, America’s 164 million credit card holders charged US$2 trillion to their credit cards, putting themselves into a highly unsustainable debt situation.

Not surprisingly, as US property prices began to peak around that period, the number of young Americans between the ages of 25 and 35 who were living with their parents shot up at the same time that home ownership figures plunged.

Today, as the promise of a recovery continues to elude much of middle class America, a whole range of commentators are giving their fellow citizens well meaning advice on how to survive the worst economic crisis in living memory. The tips range from hoarding gold to investing in arable land, and even to buying guns, in anticipation of civil unrest from millions of disgruntled citizens.

We have not gone too far down the path of a debt-driven economy to fear such a fate, but the welfare of our people requires an honest look at where we are heading