Sunday, December 23, 2012

OVER-SPENDING YOUR WAY TO DEBT AND BANKRUPTCY

Do we need that many credit cards?
Credit cards are both a boon and a bane depending on our spending habits. I have only one credit card to my name, and it has served me well all these years. To be honest, I was quite miffed when the banks rejected my application for a new credit card ten years ago. I had just retired then. I thought I was a victim of age discrimination. 

But after reading about the rising number of credit card defaulters who have been declared bankrupts in recent years, I can see the wisdom of having one or two credit cards to curb the temptation to buy whatever captures my fancy. 

According to the Malaysia Department of Insolvency, between 2005 and June 2012, a total of 243,823 people have been declared bankrupt in the country, with the majority under 45 years of age. Our adult children fall into this demographics.

While we may be prudent in our spending, the same cannot be said of our adult children. Irrespective of whether they are working or still studying, many of them want to own the latest, the trendiest, the best. Their culture is one of instant gratification. They have their own interpretation of "Live life to the fullest", and "Live as if there is no tomorrow". 

How many times have parents stepped in to help settle their children's credit card debts and outstanding loans? As soon as young people get their first paying job, they want to buy a car/motor-bike, the latest smart phone, trendy clothes and eat at the best restaurants. 

Banks make it so easy for young people to spend, spend and spend by issuing them credit cards and requiring them to pay only 5% of the outstanding sums. And so their credit card debt snowballs from four figures to five figures and more. In Malaysia, creditors can initiate bankruptcy proceedings against anyone who owes them RM30,000 or more. 

To curb credit card debt, Bank Negara in 2011 introduced new requirements for credit card eligibility. Applicants must have a minimum annual income of RM24,000. The central bank has also capped the maximum credit limit to double the monthly income for those earning less than RM36,000 per annum. However, strict enforcement of these rules is a different matter.

In Singapore it's a similar situation. The Straits Times of Singapore yesterday reported the case of a marketing executive who said she would pay only the minimum sums on her seven credit cards. Over time her credit card debt ballooned to S$50,000! Credit Counselling Singapore data shows those being counselled for debt problems rose from 1,066 in 2010 to 1,480 during January to November this year.

The Monetary Authority of Singapore (MAS) is also looking at introducing tougher rules to discourage credit card holders from spending beyond their means. On the flip side, the MAS is proposing to relax rules to enable retirees to obtain credit cards if they have at least S$15,000 annual income, net personal assets of more than S$750,000, or a guarantor with an annual income of at least S$30,000.

From The Straits Times 22 Dec 2012

Our young people shouldn't act so flippant about being declared a bankrupt. Once an individual is declared a bankrupt, he has a tough time getting loans from legitimate financial institutions. He has to give up his assets, including his home. He has a black mark on his financial record which follows him everywhere, even at immigration check-points. 


For those seeking help with their debts, do check out the free Debt Management Programme conducted by Credit Counselling and Debt Management Agency (AKPK), an agency set up by Bank Negara to help individuals take control of their financial situation and use credit wisely.

1 comment:

Tim Otis said...

Good post, I am glad to visit your website.. This article gives the light in which we can observe the reality and it is very useful one and gives in depth information. Banking Tips