The credit card war among banks has created easy access to credit and as a result more and more people are being trapped in a “credit web”.
A Finance Ministry official says the number of those who only manage to pay the minimum 5% of their outstanding balance has increased significantly beyond last year’s statistics of 40% of the 8.8 million credit card holders.
Despite the Government's reminders to be more selective in issuing credit cards, banks have instead become more aggressive in signing up more clients.
And they are coming out with “innovative” ways of getting new clients. Among these are free gifts to those who sign up; “mandatory” credit cards for purchasers of certain car models; and a cheque for a sum of money in one’s name. In other instances, gold cardholders are given a status boost with platinum cards and higher credit limits.
The reason is simple – credit cards offer the most lucrative form of business to banks, with an interest fixed at 18% per annum.
And it's simple arithmetic – the less one pays of the outstanding credit balance, the more money a bank makes.
Many credit card holders face credit that has snowballed to an uncontrollable amount, resulting in their not being able to service the debt at all.
The Treasury intervened last year when it was revealed that credit card defaulters accounted for RM700mil of the RM18.6bil in non-performing loans.
“Many credit card holder pay only the minimum 5% of their monthly balances. This means they have to pay a 1.5 % monthly interest on the remaining balance and this can cause the outstanding figure to balloon,” said a senior Treasury official.
Last year, Bank Negara deputy governor Datuk Mohd Razif Abdul Kadir asked banks to study spending trends that showed early signs of financial mismanagement to put the lid on spiralling bad debts.
He proposed that such cardholders be referred to the Credit Counselling and Debt Management Agency for counselling.
So why have banks not acted to stem the credit tide? The answer is becoming clearer as credit card debts continue to mount.
The Treasury official, who was asked the question, had this to say:
“There are already complaints of too many regulations in the banking industry. We must remember that this is a free market.
“It is also the cardholder’s responsibility to handle his finances properly. Banks can give you 100 credit cards for all they want. Ultimately it is the credit cardholder who must be disciplined and responsible with his expenditure.”
Drawing an analogy on the dangers of smoking, the official said: “Cigarettes are on sale everywhere. Does that mean that everybody will become a smoker? Does it mean that the sale of cigarettes be banned?”