Tuesday, 16 December 2014

$10b in outstanding credit card loans by Xmas

But two in three customers still pay off debts in full every month
By Radha Basu, Senior Correspondent, The Sunday Times, 14 Dec 2014

Paying with plastic has become so common that outstanding credit card loans are set to top $10 billion for the first time by Christmas, according to figures from the Monetary Authority of Singapore (MAS).

Overall, unpaid balances were at $9.98 billion as at October, the latest month for which figures are available. That is a jump of more than 70 per cent from $5.8 billion for the same period in 2009, just five years ago.

December, with year-end festive shopping and holidays, has always been the month when people use their credit cards most.

Bad debts written off by banks this year rose by nearly 50 per cent to $225 million by October, compared with $152.9 million in the first 10 months of 2009.

And rollover balances - bills that are not paid in full - have also jumped 50 per cent to $5.4 billion over the same period. Several banks recently raised interest rates on credit card bills.

According to figures from Credit Bureau (Singapore), there were nearly 1.58 million credit card consumers as of October, up from 1.2 million in October 2009.

Around one in three cardholders - or nearly 540,000 people - were not paying their bills in full as of October.

And 3 per cent of cardholders - or around 47,000 people at last count - have debts exceeding a year's salary.

Although this group is a concern, experts The Sunday Times spoke to said what the data shows most clearly is that more people are using their credit cards for many more transactions than in the past.

These days, plastic is used to pay not only for big purchases but also grocery shopping and eating out at modest restaurants, as well as for purchases overseas.

"Spending more is not the same as overspending," said Mr Kuo How Nam, president of Credit Counselling Singapore which helps people deep in debt to draw up instalment plans to repay what they owe.

Significantly, the proportion of credit card holders unable to pay their bills in full has remained largely stable - at around one in three - over the past five years.

Bad debts written off as a proportion of rollover balances too have remained stable at around 5 per cent over the past five years.

"The percentage of loans going bad has remained stable, so that is a big relief," said Mr Kuo.

But still, the numbers of those who do not pay in full or those who default on at least a month of payments need to be monitored carefully, he said, adding that MAS was already doing so with more curbs coming in next year.

Those who owe more than a year's salary will have their credit facilities suspended and be asked to pay off the excess by next June, pointed out Mr Kuo.

"They must update their income information with the banks and also immediately take action to bring down their debts to avoid their credit cards from being suspended," he noted.

Dr Siriwan Chutikamoltham, senior lecturer and director of banking and finance at Nanyang Business School at Nanyang Technological University, concurred that the overall credit card situation did not warrant red flags. However, more nationwide data was needed on those who have difficulty paying, she said.

It would, for instance, be useful to know the detailed demographic profiles of those who defaulted on the credit card loans and also the reasons for their default.

"It is important that you identify the type of credit card holders that are susceptible to problems so specific policy can be devised to target them," she added. For example, if a particular age group had a higher default rate, then banks should set a more stringent credit standard for this group.

Meanwhile, with Christmas approaching, Mr Kuo warned consumers to be prudent about spending. "Like a hangover after a party, every year, billings and defaults rise after the festive season," he said. "It is always better to be safe than sorry."

Credit situation remains sound: MAS

The consumer credit situation in Singapore remains sound, says the Monetary Authority of Singapore (MAS). Most consumers use their cards prudently as a payment channel rather than as a source of credit, with around 64 per cent of cardholders paying off their balances in full every month.

The proportion of people who default on their credit card debts remains at less than 0.2 per cent of the total credit cardholder base, a central bank spokesman told The Sunday Times.

However, there is a small group with unsustainable credit card and unsecured debts. Nearly 50,000 people, for instance, have debts that exceed their annual income.

1 Enhanced credit assessment

Since June, financial institutions have been required to conduct checks with credit bureaus and take into account the total credit limits and total outstanding debt balances of a borrower before they can grant him or her a new credit card, a new unsecured credit facility or an increase in credit limit.

2 Measures to prevent debt accumulation

From June next year, a financial institution will not be allowed to grant additional unsecured credit to a borrower who is 60 days or more past due on any credit card or unsecured credit facility.

In addition, other financial institutions will not be able to increase credit limits or grant new unsecured facilities to this individual.

They will also be prohibited from granting further unsecured credit to a borrower whose outstanding unsecured debt aggregated across all financial institutions exceeds his annual income for three consecutive months or more.

3 Information disclosure

Also from next June, financial institutions will be required to disclose to borrowers who do not pay their bills in full how their debts will accumulate and how long it will take for them to settle their debts fully if they were to pay only the required minimum payment every month.

"These measures aim to encourage financial prudence and help borrowers make more informed borrowing decisions," the MAS spokesman told The Sunday Times.

The authority will continue to monitor trends in unsecured credit facilities and credit cards.

Siren call of designer goods

Around 3 per cent of credit cardholders - about 47,000 people - have debts exceeding a year's salary. Two women and three men tell Radha Basu how they got caught in the debt trap.

Over just one year, fashion firm accounts executive Jennie Tan, 36, accumulated 10 designer bags.

The most expensive - a quilted black Chanel - cost $7,000 - 21/2 times her monthly take-home pay. Prada and Louis Vuitton were Ms Tan's other favourite brands.

She liked designer shoes too, quickly adding Bally, Prada and Ferragamo heels to her growing closet.

A graduate of the Institute of Technical Education, Ms Tan worked near the brand-name shops of Orchard Road - and that was her downfall.

She would pop into boutiques at least once a week to shop. "Almost everyone in the Orchard Road area is so well dressed, and I had to meet clients," she says.

She earned around $40,000 a year but had 10 credit cards that she used to pay for her purchases.

She paid the minimum on her credit card bills, and would sign up for new cards as her debts ballooned.

"What I found incredible was that even banks I owed money to would call me to offer me new cards," she says.

Finally, fear that her husband and family would find out about her debt drove her to seek help at Credit Counselling Singapore. She earns more now, and is working to pay off her $115,000 debt.

"The moment you are borrowing from one bank to pay another, you should know you are in trouble," she says.

She still works in the Orchard Road area, but this Christmas, she is staying away from the year-end sales.

Single mom spent $7k on $4k pay

Single mother Cheryl Ang, 50, earned $4,000 a month as an executive in a software firm but often spent $7,000 on her credit cards.

During the festive season from Christmas through to Chinese New Year, her monthly borrowings could top $10,000.

There would be expensive year-end holidays - to Australia, Japan and South Korea - with her only child, a daughter, now 18.

"Everyone in her school was always going away for holidays, and I did not want her to feel left out because her parents were divorced," she told The Sunday Times.

Her "credit card habit" coincided with her divorce in 2002. Guilt that her daughter was growing up fatherless was a big factor in her spending, she says.

Aside from eating out at high-end restaurants, the mother and daughter had a comfortable, well-furnished Housing Board flat. Ms Ang changed her car every two years.

Holiday and leadership camps and tuition for her daughter cost at least $1,000 on credit cards every month.

Ms Ang indulged herself too, buying beauty, massage and hair treatment packages costing more than $30,000 a year.

"I kept thinking my daughter deserved the best and I did too, since I worked so hard," she said. "And I was confident I would earn it back."

She did not. By 2006, instead of an expected promotion and pay rise, her bonus was cut because of poor company performance.

She began paying the minimum on her bills and signed up for more cards. "I was soon borrowing from one bank to pay another."

Unwilling to change her lifestyle, she worked harder still. By 2009, although her salary had increased to $7,000 a month, debts on her 10 credit cards had ballooned to $180,000.

That same year, she landed at Credit Counselling Singapore to begin the long hard road to a debt-free life.

The non-profit group, which helps people manage their debts, spoke to her banks and helped work out a monthly instalment plan to repay what she owed. She was finally declared debt-free in July this year.

These days, she still dresses tastefully, except that her clothes are cheap buys from Chinese websites. Once-prized possessions like her Burberry bag and Rolex watch are gone too.

When she meets The Sunday Times, she is immaculately turned out in white slacks and a blue and yellow paisley shirt. "Who would have thought that you could buy pretty clothes online for only $15," she laughs, referring to her shirt.

She has sworn off credit cards and uses a debit card instead, which deducts money directly from her bank account every time she makes a purchase. "I don't want to fall into the debt trap ever again," she says firmly.

Dreams of good life turn bad

Higher expenses after marriage and the lure of making a quick windfall through the stock market led bank executive Nick Tan 40, to start trading in stocks in 2006.

"I was a newlywed and wanted to give my wife and future children a good life," he says of his early urge to start trading in shares. "My $6,000 salary was not enough. I had greater expectations."

But the stock market proved to be a gamble and he lost $100,000 in a year.

He then tried to recover the money by cashing out credit cards and credit lines - he had 10 in all. But borrowing from one bank to pay another only pushed him deeper into debt.

Crippled by high interest rates, he then took to online gambling and that began a downward spiral that took five long years to reverse.

He paid off debts amounting to nearly $220,000 last December. But his marriage is in a shambles, he is currently unemployed and is still being treated for gambling addiction.

"Paying for a good life with credit will just not work," he told The Sunday Times. "And there is no such thing as getting rich quick."

Between 2009 and last year, men who approached Credit Counselling Singapore had debts of $82,000 on average, skewed in part by gamblers like Mr Tan.

Job-related changes - such as a pay cut or retrenchment - and overspending are the most common reasons people chalk up high credit card debts, said the organisation. Gambling is a key reason, especially among men.

A big life change, such as marriage, brings with it a big risk of spiralling into debt.

Like Mr Tan, IT consultant Michael Yeo's debt woes began with his own wedding.

Over the course of a year, the 41-year-old chalked up $53,000 in credit card loans, with the bulk of it used to pay for renovating and furnishing his new five-room flat. "We did not even use luxury fixtures or furnishings, but the bills added up," he said.

Another man, Mr Alton Lim, 34, blames his $105,000 debt largely on "business failure" but, in reality, he was just too gullible.

A games instructor in a recreational firm earning less than $3,000 a month, he fell for the big plans of a drinking buddy who wanted him to be a partner in opening a bistro.

Mr Lim and two other friends borrowed $60,000 each on their credit cards and lent the money to the aspiring businessman, who disappeared soon afterwards.

"I know in hindsight it sounds incredible, but it's true," Mr Lim told The Sunday Times.

The eldest of three children of a taxi driver, he lives with his parents and is still paying off his debts. Although he did not buy any luxury goods or overspend on holidays, "just a dream of owning a business landed me in trouble", he said.

The names of all borrowers have been changed.

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