Wednesday 26 November 2008

Credit Card Defaulters’ Numbers Rise

More could get caught in debt trap if bankruptcy, jobless figures go up

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Guanyu said...

Credit Card Defaulters’ Numbers Rise

More could get caught in debt trap if bankruptcy, jobless figures go up

By Gabriel Chen
26 November 2008

Credit card users in Singapore are not defaulting in significant numbers despite the challenging economic times.

However, the number of card users getting into trouble is creeping up.

And industry insiders warn that if unemployment continues to rise along with the number of bankruptcies, many more could get caught in the plastic debt trap.

The last major spike in missed payments on plastic credit came in the wake of the Sars crisis in 2003.

Banks define a credit card default as account closed with an outstanding balance or where the bank has written off the balance as bad debt. A delinquent card is less serious - an account where payments are 30 days or more overdue.

According to the latest figures from Credit Bureau Singapore (CBS) for the quarter ended Sept 30, a monthly average of 1.43 per cent of consumers missed at least one payment on one or more of their credit card accounts.

That was a whisker higher than 1.29 per cent in the same period last year.

It translates to an average monthly increase of 2,649 delinquent consumers over the third quarter last year.

Despite the rise, credit card delinquencies in the third quarter remained ‘significantly lower’ than those in the aftermath of the Sars downturn, which peaked at 2.66 per cent in February 2004.

Card users who pay only part of the full amount are known as revolvers.

In the third quarter, card users who were revolvers edged up to a monthly average of 38.26 per cent from 37.29 per cent in the second quarter. But this was below the peak of 42.76 per cent in April 2004.

As for the worst offenders, a monthly average of 0.15 per cent of card users had at least one credit card account declared to be bad debt in the third quarter, a slight rise from 0.13 per cent a year earlier. But again, the proportion of consumers with bad debt remained well below the post-Sars nine-month average of 0.19 per cent, CBS said.

Another key indicator of credit card trouble is when users rely on cash advances which incur heavy interest charges.

An average of 10.94 per cent of consumers withdrew cash on their credit card at least once in the third quarter.

Industry watchers say that while there are occasions when people use such a facility while travelling, they do this typically as a ‘last resort’ given the high interest rates. In the nine months after Sars, an average of 13.38 per cent used cash advances.

‘Although the economy went into the red in the third quarter, CBS statistics currently show no significant spike in delinquency and default on credit cards and personal loans,’ said CBS executive director William Lim. ‘Consumers in Singapore continue to manage their credit card and personal loan payments for now.’

Card issuers here say they use a robust system of credit processes and policies in assessing all card applications.

‘Regardless of the economic situation in all the markets that American Express operates in, we regularly review our card approvals, credit limits and pricing as a matter of policy,’ said Mr. Simon Kahn, Singapore country manager for American Express International. ‘We are doing the same for the Singapore market and at this point in time, there are no changes.’

Still, while card issuers are adopting a prudent approach, experts say that there is no denying that the situation could get much worse in the next few months.

‘Give another two to three months, and we’ll hit those Sars levels,’ said Mr. Paul Chan, ex-president of the Insurance and Financial Practitioners Association of Singapore. ‘Just go down to Boat Quay during lunch time. The restaurants are all empty, and the credit crunch is beginning to bite.’