Jul 29, 2007

Credit Cards For the Zero Income Earners

ST July 29, 2007
Have card, no income, know the risks
Be aware of legal issues facing those under 21 such as the penalty for missing payments
By Lorna Tan

EASY credit has long been a fact of life for many Singaporeans. But now the floodgates are being opened to vast numbers of people who would normally never manage to get their hands on plastic.

Eighteen-year-old youth and those with no or low income can now apply for a ground-breaking card that does away with the standard $30,000 minimum annual income requirement.

Regulatory changes have allowed Citibank to launch the card, which offers a maximum credit of $500, a fraction of the typical limit of two months' pay.

In my opinion, this new Citibank initiative is at least partly due to the recent decision by NETS to approximately triple its administrative fees for retailers.

In order to allow their customers to make payment by NETS or credit card, retailers have to pay fees to NETS and credit card issuers. Traditionally, credit card issuers charge higher fees than NETS. That's why lower-end retailers accept payment by NETS, not credit card.

Now, by raising its fees, NETS has made it possible for the likes of Citibank to compete in the space of facilitating low-cost cashless transactions. If NETS facilities are not any cheaper than credit card facilities, your average HDB shop owner who allows you to pay by NETS might as well also allow you to pay by Visa or Mastercard.

The first step by Citibank, of course, is to ensure that the average customer of the average HDB shop can have a credit card, and not merely a NETS card. Since the MAS regulations have changed such that there is zero income requirement to get a credit card, your average HDB customer WILL be able to get a credit card.

Applicants under 21 need the consent of their parents, but the bank will not require parental income information. However, the bank is playing it safe: If the minimum monthly payment is not made, the card will be blocked.

The Citibank move - which could admit more than 900,000 people to the ranks of new credit card users - has sparked debate over whether Singaporeans, particularly teenagers, can be trained to use credit responsibly.

It is a pressing issue as more of such products are in the pipeline, with OCBC Bank and United Overseas Bank saying they will introduce similar cards soon.

Some people are concerned about the danger of raising a generation of young adults who chalk up debts even before they leave school.

I think the attention got a bit misdirected. They forgot about the adult uncles and aunties in the heartland - the ones who queue up at the 4D and Toto outlets, and/or who are genuinely struggling to make ends meet.

"My income close to zero, what. I also over 21.
Maybe can use credit card to buy 4D."

How much will one be able to borrow via credit card, if one has no income? According to the ST article, it's $500. Of course, this is on a per bank basis, and we also learn from the article that apart from Citibank, two other banks - OCBC and UOB - will be introducing similar cards.

If you have zero income, but apply simultaneously and successfully to all three banks, you'll be able to borrow $1,500. If you wait and see if HSBC, Maybank, ABN AMRO and Standard Chartered come up with similar cards, who knows, you may be able to get 7 cards x $500 = $3,500.

Not bad for someone with zero income. A pretty good recipe for financial disaster too.

One interesting thing to watch is how the nature of credit card advertising will change as a result of the new rules. In the past, credit cards were often marketed as a symbol of the customer having "arrived", being successful etc. In fact, a credit card is one of the
five C's that commonly represent material achievement in the Singapore lifestyle. But now that kids and poor people can also get credit cards, I think that the usual advertising/marketing themes will have to change.

Into what? That's the interesting question.


Ryan Bong said...

Your link above doesn't go to any specific webpage on Wikipedia. COuld you mean this link instead?


Unknown said...

Assuming all the banks who implement this new kind of card keeps to what Citibank is going to do which is to freeze the account once payment is not made, the scenario you painted might not be as bad as you think. Although one may argue that 28% per annum interest is no joking matter, but at least, its going to be on $500 only if the user screws up instead of a potentially $5000 or more.

zanzoo said...

I guess that is why now some shops, like videoezy, only accept NETS payment for $20 and above,
something that I used to see only for credit card payment ?

I wonder whether NETS still has the advantage due to supporting infrastructure (the NETS machines?) ?? cf with credit card payment ?

Juzme said...

This is madness. And only last week, credit card companies like American Express had decided to increase their reserves because the expect more bad debts and a tougher time in recovering monies owed to them.

What is the Singapore government thinking? I'm not sure if i know of any other country which gives credit cards to people without requiring a basic minimal income.

And in the 1st place, why are Singaporeans so big on plastic money? As far as i know, credit cards/debit cards are no where as popular in other countries but only in Singapore.

Plastic money doesnt come free. Why do you think cost of living in Singapore has been rising faster than you can say "oh dear! what happened?" - But i reckon Singaporeans find it hard to see it from that point of view.

Yes yes...Mr Wang...it's a perfect recipe for disaster. Let's just give it some time and we'll soon see.

JustCate said...

I am not for young people who don't earn their means to hold credit cards, but this one may not be so bad because fo the $500 cap. It will be useful for students studying overseas and certainly more preferential to a supplementary card. Having said that, it is always up to parents to educate their children to be prudent from a young age. That may sound like common sense advice but many parents indulge their kids from young.

chemgen said...
This comment has been removed by the author.
chemgen said...

Depending on the credit card user in question, this scheme helps those who can use their card wisely. The current minimum $30000(?) salary criterion is tough. A credit card is useful for paying bills, online purchases like travel insurance, plane tickets, hotels. A lowering of income ceiling is probably a more "ethical" approach, assuming if the banks are interested in that.

However, I agree that a zero income criterion is the other extreme and bad debt, however small, might be something that would pop by soon.

Would a credit card holder be automatically entitled to a credit line? That is where the individual's bad decisions might multiply - the IR is coming along and quick easy cash is certainly attractive for the gambler-unwise credit line user.

hash said...

Our HDB uncles/aunties will simply compare the interest rate of credit card company and loan sharks.
Let's say the loan shark offers you $1000 at 2% per month (compound), which is about 27% a year. I don't see how different this is from loaning the $1000 with two credit cards. (What is the rate in Singapore? it's usually 2%-3% in my home town.)
If you fail to pay back the loan. Loan sharks and banks both have their ways to squeeze some money out of you. Are bankers and lawyers more benevolent than gangsters? I think uncles and aunties know better.
Simply put, poor people also need to finance emergent needs. Now we have pawn shop and loan shark. Do you have a better offer?

Mr. John Tan said...

Re: Jean's comment

If I don't remember wrongly, the credit card mkt in HK is also very saturated.

Greg said...

maybe i'm being a bit sensitive but i tot using that pic of a hawker was kinda patronising to them when you have already made ur point.

Juzme said...

To: John

Since 2002, Hong Kong’s major credit card issuers have been making efforts to curb their rising Non-Performing Loan (NPL) level by becoming more stringent in issuing new credit cards since the economy went downhill in that same period. Recent credit card write-offs were as high as 8%.

Several foreign banks took drastic measures to curb credit card bad debt, including adjusting credit limits downward by as much as 20% or closing card holders’ accounts.

However, in that same period, according to a study by the Nanyang Business School, the main driving factor behind the 54% increase in new credit cards issued is due to competition amongst foreign banks such as HSBC, Maybank and Standard Chartered, which have been pressed to offer zero-interest installment facilities and higher credit limits, while waiving joining and annual administration fees. And not surprisingly, bad debts rose 28% to S$79.1 million in 2001. They also surged 58% year-on-year in the second quarter of 2002 to S$32.7 million.

Even with a minimal salary requirement, bad debt figures soared. Should anyone be surprised if this figure explodes when the minimal salary criteria is removed?

Juzme said...

On the same note of comparing Singapore to other Asian countries, Singaporean household liabilities were about 85% in 2004. Hong Kong and Japan's average household liabilities in that same period was 60% and 64% of GDP respectively.

In direct comparison with HK, the charge-off rates (defined as bad debt written off as a proportion of average rollover balance) for Singapore in 2004 was 5.8% while HK's was 7.7%.

So perhaps comparing Singapore with another worse off country in terms of level of bad debts written off may not be the best example.

Singapore is fast becoming a nation of people living on debt. Asset rich but cash poor. The best example would be buying property in Singapore...buying property which only have a 99 year lifespan. So in actual fact, this property isnt even yours.

I'd rather be cash rich.

Unknown said...

I think banks are capitalising on this opportunity..

One, to cultivate youths' dependency on plastic to attain their luxurious needs.. impressionable youths are easy targets for marketing gimmicks..

Two, very 'subtle' indeed.
It appears to me that this is akin to a "supplementary card" as more often than not, parents will end up paying the bills and on behalf of the child. Recovered credit leads to more spending.

smarter parents may take this opportunity to give their kids a lesson in the rat race

shannon said...

it would seem to me that if you have zero income, you might want to stay away from credit cards altogether. if you absolutely HAVE to have one, in case of emergencies or what have you (seeing as every place now will accept credit cards, they are handy to have), i would reccomend a secured credit card. you don't so much have to worry about paying one of thsose off when you don't have any income.