Friday 13 September 2013

New rules to curb credit card debt, unsecured loans: Monetary Authority of Singapore

Changes by MAS meant to stop people from over-borrowing
By Mok Fei Fei, The Straits Times, 12 Sep 2013

PILING up credit card debt and other unsecured loans will be far harder under sweeping new rules aimed at improving lending practices and preventing people from falling deeper into the red.

The changes, which were welcomed by banks, were unveiled by the Monetary Authority of Singapore (MAS) yesterday.

They follow earlier moves to limit borrowing on homes and cars.

Some of the key moves target people who are already struggling with unsecured debt such as credit cards and personal credit lines, which are not backed by collateral like property or cars.

Individuals whose unsecured debts are more than 60 days past due - with not even the minimum repayments made - will not get further credit.

They will also be barred from new loans if their total unsecured debt exceeds 12 months of their income for 90 days.

So if a person earning $4,000 a month has had credit card and similar debt worth over $48,000 for more than 90 days, he will not be able to charge more to his existing unsecured credit facilities or borrow from any bank.

The MAS said it chose 12 months as the limit to balance between financial prudence and the needs of some borrowers who "rely on significant amounts of unsecured borrowings".

But it advised borrowers to stay "well within the 12-month limit, as such borrowings typically attract high interest costs".

People with financial commitments such as car loans can find themselves in financial strife with even a few months' income worth of unsecured debt.

The MAS said it may lower the limit if necessary. These new rules kick in on June 1, 2015.

Other major shifts include requiring banks to review a borrower's total debt and credit limits before granting a new credit card or an unsecured credit facility. This takes effect in June next year.

Banks can now access only credit bureau reports that do not show a borrower's outstanding debt, noted Mr Kuo How Nam, president of non-profit group Credit Counselling Singapore.

Before raising a borrower's credit limit, banks must also do a new credit check and obtain the borrower's written consent.

Another key change is that banks will have to inform borrowers who roll over their debts what the potential costs and total debt could be. "This will help borrowers make more informed credit decisions," the MAS said.

Not all the new rules are stricter. For individuals aged over 55, getting a credit card will be easier if they have enough personal assets or a guarantor.

The Association of Banks in Singapore said it supports the measures, which come after a public consultation in December.

Capping credit

From Dec 1 this year:
- Credit bureau and income checks must be conducted before raising credit limits for a borrower.
- Checks must be repeated if a financial institution is alerted about a borrower's potential debt problems, for instance, by family members or credit counsellors.
- Borrowers above 55 years old will qualify for credit cards if they meet any of these qualifications:
(a) Annual income of at least $15,000;

(b) Total net personal assets of over $750,000; or

(c) A guarantor with an annual income of at least $30,000.
- Rules about solicitation and credit bureau checks will be extended to credit cards with credit limits of $500 or less. These rules are:
(a) Applicant will need to submit written consent and signature;

(b) Such cards cannot be applied for at temporary locations set up by banks;

(c) Credit bureau checks must be conducted for each applicant.
- Most rules for unsecured credit will be extended to unsecured loans that are currently exempt, such as business, renovation, medical and education loans. The new rules will also apply when they kick in except the rule on total unsecured debt not exceeding 12 months of a borrower's income.

From June 1, 2014:
- Financial institutions must review borrowers' outstanding debt and credit limits before granting unsecured credit.
- Credit limits cannot be raised without borrowers' consent in writing.
- Borrowers must indicate preferred credit limits when applying for credit cards, unsecured loans and credit limit changes.

From June 1, 2015:
- Borrowers who are 60 days or more overdue on any credit card or unsecured loan cannot obtain more unsecured credit or credit limit increases.
- Borrowers whose total unsecured debt has exceeded 12 months of their income for 90 days or more cannot obtain more unsecured credit.
- Financial institutions must tell borrowers the total amount and time needed to fully pay off their debts if they make only the minimum payment each month, and the amount of debt that would accumulate by the end of six months if no repayments are made.
- Financial institutions can exceed regulatory credit limits to refinance debt that a borrower transfers from another bank.

New credit curbs 'timely in keeping a lid on debt'
Non-profit group says new rules will let banks make better credit assessments
By Rachael Boon, The Straits Times, 12 Sep 2013

THE new credit card and unsecured credit rules are a timely step to help prevent people from taking on unsustainable levels of debt, said a leading figure in the financial services industry yesterday.

Mr Kuo How Nam, president of non-profit group Credit Counselling Singapore, told The Straits Times yesterday: "It's a problem when people are carrying on borrowing because they can't pay back in full, and debt keeps on accumulating.

"When they max out their card, they borrow from another bank. One of the main problems comes from rolling over unsecured debt and the debt will balloon to unsustainable levels."

Unsecured loans do not require collateral, so they differ from home and car loans.

One of the new rules announced yesterday requires bank and card issuers to review a person's total level of debt and credit limits before granting new credit cards or increasing credit facilities.

Mr Kuo said: "At the moment, the credit bureau reports do not show the outstanding debt, only the financial institution's name and the product. I believe now the banks will know how much the person owes, instead of having to guess."

He also backed the new rules that bar unsecured credit from being extended to people who have not met specified payment dates on existing debt.

"(This) should help prevent the build-up of accumulated debt which is unsustainable - being 60 days overdue is the first warning sign."

The rules also state that a person who has unsecured debt of more than 12 months of income for 90 days or more cannot get further credit.

"The limit of 12 months of income for 90 days or more will put a cap on a person's ability to accumulate big debt," noted Mr Kuo. "All the changes will enable banks to make a better credit assessment. There are some signs that the credit card debt is building up to an unhealthy level, but this is still manageable.

"These are preventive steps to try and dampen it, to prevent it from reaching critical levels."

Mr Desmond Tan, OCBC Bank's head of group lifestyle financing, said: "We welcome the policy change to further strengthen the criteria to prevent overborrowing.

"We assess and approve each application on the basis of the customer's credit worthiness, taking into consideration factors such as the individual's financial commitments, income level, credit history and repayment ability, among others."

A logistics worker who wanted to be known only as Peter said the changes, if implemented earlier, could have helped him avoid the credit trap.

He said he used to have seven credit cards and was attracted by promotions such as six-month interest-free loans, which he used for daily expenses such as his children's school fees and groceries. "The rules can be more strict with the credit limit, and there shouldn't be so many advertisements for so many cards. Banks kept calling and in the end, I was overloaded with cards...

"When you have too many cards, you can't keep track of them, and when you don't pay back on time, the interest just keeps snowballing," said the 35-year-old, who now does not own a credit card.

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