Standby Money - Get It While You Can

In my earlier post, I wrote about the need to have emergency cash reserves. If you don't already have them, here's a quick way to build them up. From the TODAY newspaper:

Income checks: Onus on banks or borrowers?
Issue arises as more lose jobs, fall below salary threshold
Tuesday • March 10, 2009
Neo Chai Chin

A “WEIRD” conversation public relations consultant Lim Wee Ling had with a bank telemarketer a month ago went like this: “Ma’am, do you need a credit line?”

“No.”

“But you could always do with another credit line. It’s possible that you could lose your job really quickly.”

Ms Lim, 31, was puzzled. “If I’m going to lose my job, all the more they shouldn’t be asking me to take credit,” she told Today.

In general, it is of course a bad idea to live on credit. In fact, I always think that anyone who actually pays interest on his credit cards must be either stupid or desperate.

Personal credit lines are a little different. Consider the fact that we are all now facing a prolonged economic crisis. You might have a job, but who knows whether you'll have one in six months' time, or a year's time. If you have plenty of emergency cash reserves, then you might not be that worried. But if you don't ....

While you still do have a job, you can get a personal credit line. When you don't have job, you won't be able to do so. So while you still have a job, perhaps it could be a good idea to apply for personal credit lines.

You then keep them on standby. As long as you don't use them, you won't have to pay any interest. But you keep them on standby, just in case someday in the future, touch wood, you do need to use them. (And I mean use them for essentials, not items like a new flat-screen TV).

In the not-so-distant past, a bank would normally grant to an individual a personal credit line equivalent to about twice the person's monthly salary. Under the new MAS regulations, a bank will be allowed to extend the person up to 4 times his monthly salary (if his annual income is at least $30,000).

So now, if you go apply for personal credit lines from three or four banks (eg DBS, OCBC, UOB and Standard Chartered), you could have an aggregate amount of credit lines easily exceeding your entire annual income.

Another consumer, Mr Lai Siew Kuan, got a call last week from a telemarketer, who told the 35-year-old property agent he could apply for a credit card even with a yearly income of $24,000 — that’s $6,000 below the qualifying income stipulated by the Monetary Authority of Singapore (MAS), for those aged 55 or younger.

Even as more Singaporeans fall victim to pay cuts or job losses, banks were recently reminded to periodically check the incomes of their credit cardholders. But how strict will banks actually get?

Last month, the MAS implemented revised guidelines on unsecured credit. One industry query it addressed was: What should happen with a credit cardholder whose annual income has fallen below the $30,000 threshold?

While such a customer may keep his existing cards, the MAS said, the bank must adjust the overall credit limit to twice his latest monthly income — and not grant any more credit until the customer’s outstanding sum falls below this new cap.

That's what the MAS said, in response to an industry query.

However, the actual regulations don't place any significant duty on banks to monitor on an ongoing basis the individual's employment status or monthly salary. In other words, at the time you apply for a credit line, the bank will ask you for your income statements.

Thereafter, the bank generally leaves you alone. Even if you lose your job the following month or your salary is cut, the bank generally wouldn't know and therefore your personal line of credit therefore still remains intact.

As a practical matter, it is not feasible for a bank to monitor its retail customers that closely. There are just too many retail customers.

But, judging from banks’ responses to Today’s queries, credit cardholders need not expect a sudden slew of letters or phone calls from their banks asking for proof of their latest income.

OCBC Bank said the typical practice is to conduct checks “at selected points in time, such as at the point of application as part of the process in providing a new card”, said Ms Lynn Gaspar, its head of lifestyle credit.

Association of Banks in Singapore director, Mrs Ong Ai Boon, said periodic income reviews on customers are done to “better assess their credit needs”. Income documents are required when applying for a new credit card, an additional card, or an increase in credit limit.

Standard Chartered and OCBC both told Today they had “robust” risk assessment and credit processes in place to lend responsibly. OCBC and United Overseas Bank also encouraged customers who experience difficulty with repayments to approach them, so as to explore options on a “case by case basis”.

I have two personal lines of credit. One is from DBS and the other is from RBS (formerly ABN AMRO). I never actually applied for them. They came automatically with my credit cards from these two banks. That was years ago.

And I've never used these personal credit lines. In the past, I made some attempts to cancel them, but DBS and RBS both waived the annual fees and said: "Please, please keep the lines. They're free, after all."

Oh well. Thanks then.