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.

HOW TO MANAGE YOUR DEBTS

If you have sufficient funds set aside for your retirement, you can look forward to your golden years with some peace of mind. However, the majority of us are probably still struggling to pay off housing loans and car loans. There is also the credit card debt to settle each month. The adult children have their own financial commitments to deal with as well, so we can’t expect much monetary assistance from them. There’re also medical expenses to cover, and expensive health supplements to purchase. Meanwhile, we watch the price of our shares on the KLSE nosedive, and wonder how much longer we can keep our heads above water. Circumstances like these can drive the hapless and helpless to consider taking desperate measures like seeking out Ah Longs – or worse.

So where can one turn to for some professional financial counselling? Try Agensi Kaunseling Dan Pengurusan Kredit (AKPK). It is an agency set up in April 2006 by Bank Negara Malaysia to provide financial education, credit counselling and debt restructuring services to individuals. All services offered by AKPK are FREE. Now that’s what I call public service.

I checked out the website and came away quite pleasantly surprised at the services offered. You can even download for free the e-book "Money $ense - Getting Smart With Your Money" to acquire the skills to manage your money wisely.

According to AKPK, if the following list applies to you, you are in need of financial counselling.

If you are not in control of your money;
If you have more debts than you can manage;
If you are living from paycheck to paycheck;
If you are only able to pay the minimum 5% on your credit card bills;
If you are taking cash advances from your credit card to meet your expenses;
If you do not have any savings to meet personal or family emergencies;
If you have debt collectors calling you regularly;
If you are being served legal notice of demand.

Here are some tips from AKPK on how to manage your debts:

· Calculate your total debt to income ratio – if your repayment exceeds 30% of your gross income, then you might want to start clearing some of your liabilities.

· Split your debts into “good” and “bad” categories. “Good” debts are considered necessary investments or debts that create value like home mortgages, business loans and education loans. “Bad” debts or consumer debts are for credit purchases that decrease in value with no potential to increase like buying a plasma TV set.

· List your debts from the highest to the lowest interest rate charged. Set a realistic repayment structure and a time frame within which to pay off your bad debts, starting with those with the highest interest rate charged.

· Limit yourself to one or two credit cards. Settle your credit card bills on time and in full.

· Restructure your debts. Look around for the most competitive interest rates and loan packages.

· Set a monthly budget and stick to it

· Curb your spending habits. Turn over a new leaf to avoid getting into debt again.

There are many sources of funds other than your pension or EPF. Perhaps your life insurance would have now matured. Consider selling your big family home, especially if its value has doubled or trebled; since your children would have left home by now. You could comfortably live in a smaller home with lower maintenance and the surplus from the house sale is yours.

To find out more about the Debt Management Programme (DMP) before you register for it, just attend the daily briefing at the AKPK office in Kuala Lumpur, Penang or Johor Bharu. Call their toll-free number at 1-800 88 2575 for more information.