Consumer credit can be defined as a debt that someone incurs for the purpose of purchasing a good or service. Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), consumer lines of credit, retail loans (retail installment loans) and mortgages. The spread of credit card ownership and usage across developing Asia Pacific countries has been overwhelming. A review of literature on credit card reveals that most studies have been undertaken in developed country settings. Credit cards were first issued in the USA in the early twentieth century. Since then, they have become a major system for exchange of transactions (or payments) that stimulates household and personal spending even in many developing countries of the world (Watkins, 2000). In Malaysia, cards were first introduced in the mid-1970s.
At the early stage, credit cards were only issued to professionals or those considered successful businesspersons by card issuing companies. By the end of 1970s, an estimated 20,000 cards were issued. During that time, owning a credit card was considered a symbol of prestige. However, with the passage of time, eligibility criteria for obtaining credit cards have been increasingly relaxed. As a result, the number of cardholders reached to about three million by the turn of the last century. One of the fastest ways to bankruptcy is the misuse of credit cards. One of the more common reasons that people end up filing for bankruptcy is due to too much credit card debt.
Credit cards are so often too seductive because they offer the ability to buy what we want now. We can then pay it off later, using very small and affordable monthly payments. Credit cards offer a way for us to make attractive purchases that we might not be able to make otherwise. Suddenly, it seems as though we can afford anything we want. The low monthly payments seem reasonable and easy to fulfill. That is one of the biggest problems associated with credit cards. It is easy to forget about the high rate of interest that we are paying instead we consider the low minimum payments we make each month and count that our self is lucky. We can continue for years, making minimum payments each month and building up credit card debt.
However, one day something may happen. We could have our hours cut at work, or maybe our minimum payment will be increased. We might have a costly hospital stay, or our home may be struck by a natural disaster not covered by our home insurance. Suddenly, our credit card payments do not seem as affordable as we once did. After looking at our situation, it dawns on us how much credit card debt that we have. The only way out of our financial mess may seem like bankruptcy. An article from New Straits Times Online dated 14 November 2011 has highlighted the issue of easy cash turns many into bankrupts. Easy cash here means credit card. Credit card is a familiar type of open-end credit.
The term credit card is used to cover a variety of types of cards, some of which actually do not involve credit. In general, a credit card is a plastic card printed with an account number and identifying the holder as a person who has entered into revolving credit agreement with a lender. From the article it states that Malaysian youth are becoming increasingly reckless with spending, thanks in no small measure to the convenience offered by credit cards. An average of 41 Malaysians are declared bankrupt daily, with the majority failing to repay their car purchase loans.
BANKRUPTCY STATISTICS BASED ON CREDIT CARD DEBTS IN MALAYSIA
The Department of Insolvency Malaysia (MDL) had restructured 80,348 bankruptcy cases from 2005 to May 2010 categorized as following: 31,950 cases – Malay
26,805 cases – Chinese
7,661 cases – Indians
13,932 cases – Others
Some of the cases involved in different type of loans that caused the bankruptcy: 19,380 cases for failing to settle hire purchase loans
9,464 cases for failing to settle personal loans
8,786 cases for failing to settle business loans
6,022 cases for failing to settle housing loans
4,417 cases for failing to settle credit card debts
4,291 cases for failing to settle corporate loans
3,726 stood as guarantors
CAUSES OF BANKRUPTCY
The proliferation of credit cardholders has brought an indiscriminate spending by users with many side effects. Many Malaysian consumers seem to display excessive buying behavior, commonly known as ‘‘compulsive buying.’’ Easy availability of credit and compulsive buying has led to many adverse consequences such as addiction to shopping and excessive debt. Another noteworthy feature of card users in Malaysia is that they use the card to grant loans for themselves. It is easier to obtain credit cards in Malaysia rather than applying for personal loans, which requires the applicant to comply with more formalities like providing guarantors or collaterals. It was reported that outstanding debts from credit card holders amounted to RM15.719 billion by the year March 2009 (RM or Ringgit Malaysia is the local currency, 3.40 RM was approximately equal to 1 USD at the time of study).
By the year 2009 outstanding credit card debts accounted for 1.35 percent of the total loans outstanding or 11.41 percent of the total consumer credit (Bank Negara Malaysia, 2009). On a more serious note, 6.43 percent of the outstanding debts had to be converted to non-performing loans. An alarming increase in the number of credit card holders seeking bankruptcy proceedings over the years was also reported. Shopaholic is one of the causes of bankruptcy among young people because of credit card. On average, 41 are declared bankrupt every day, mostly due to credit card debts, while every weekend, about five million peoples throng the 300-odd shopping complexes in the country. These habits are among the shocking revelations on why Malaysian consumers cannot cope with the rising cost of living. Federation of Malaysian Consumers Associations (FOMCA) discovered that many of those declared bankrupt due to credit card debts were below 40 years old. Another cause of bankruptcy is poor financial management skills.
Article from New Straits Times states that 10 million of credit cards had been issued but only 30 per cent of card holders is able to meet the monthly repayments. From the article, Chief executive officer of FOMCA Datuk Paul Selvaraj said it is because of the convenience of credit cards that people seem to prefer using them rather than cash. He also said that credit card holders do not feel the immediate pinch of emptying their wallets when they make a purchase. It was reported that those who used credit cards were more inclined to spend 17 per cent more compared with those who used cash. Besides that failing to repay credit card debts is also the cause of bankruptcy. This is because credit card interest rate for outstanding balance is very high.
Banks require consumers to pay only the minimum which is 5% or RM50 (whichever higher) of total outstanding balance (debt). If they only make minimum payment, it takes about 2 years to clear all the outstanding balance providing that there is no new spending. On top of high interest rate, consumers are also subjected to finance charges if they do not make full payments every month. This means, if they make partial payment, minimum payment or do not make payment on or before the payment due date, finance charges will be imposed from the day the transaction is posted to the card account.
The relationship between psychographic variables, attitude development and credit card usage by cardholders in Malaysia.
HOW TO OVERCOME
A total of 87,583 individuals were declared bankrupt up to October this year, with 4,651 or 5.1% of them due to unpaid credit card debts. In light of this, the government will be discussing with Bank Negara on finding a solution to the problem of high interest rates imposed on credit card users, resulting in many being unable to settle their outstanding balance. Deputy Minister in the Prime Minister’s Department Datuk Liew Vui Keong said a solution was necessary as the number of credit card users declared bankrupt was worrying with the majority of them being young people (The Sun Daily, 15 December 2010). One way to overcome credit card debt is consumers have to have full payments prior to due date. They will enjoy interest-free period for retail transactions for 20 days on retail transactions.
Cash advance, balance transfer and installment payment plan programs are excluded from interest-free period. Consumers also subjected to late payment charges minimum of RM5 or 1% of total outstanding balance, whichever is higher, up to RM50 if they fail to make payments before due date. If you have problem to settle your credit card debt, the best solutions is to cut the card and stop using it. Second way to overcome credit card debt is pay more than the minimum payment. Always pay more than the minimum amount that you owe. If you can afford to do it, double or triple the minimum payment. This will help you get rid of credit card debt more quickly. If you have multiple credit cards, you might want to concentrate the bulk of the money you have available to paying one off at a time. The credit card you should focus on first is the one with the highest annual percentage rate.
Pay this card off and then move on to the next highest one and so forth. This not only gets rid of the worst credit card debt (i.e. the one with the highest interest rate), but it gives you a sense of accomplishment and peace of mind, knowing that you have one less payment to worry about. Third way to overcome credit card debt is treat a credit card like a debit card. The biggest fallacy of credit cards is that they are ‘additional money’ to be spent each month. The typical household sees the monthly credit card bill as just another bill to spend money paying off. Worse, many people see ‘responsible’ credit card use as paying the minimum or slightly more each month. Using a checkbook to balance your finances or free financial software such as Mint.com or paid software such as Quicken can help you balance finances and ensure there will be enough money each month to pay off the credit card bills.
Every time you make a purchase with a credit card, treat it like a debit card and deduct that money spent out of checking or savings accounts. Software can do that automatically when linked to the accounts, but a checkbook or simple pen and paper works the same way. Next, set alerts to avoid missed or late payments. A missed or late credit card payment can put even the most responsible credit card user over the edge and into debt. Interest rates get raised and high fees will tack on finance charges to the bill. Set up free e-mail or text message alerts from your credit card issuer’s online account management site. If your credit card issuer does not offer online account access, consider finding a new credit card company. Many late fees and missed payments are due to using regular postal mail to keep up with bills and make payments.
Online payments are time stamped and come with an e-mail record of statements and payments. Another way to overcome credit card debt is do not spend money that we do not have. This tried and true financial tip holds true for credit cards as well. Credit cards can be an excellent financial tool to establish and build credit. They can also allow responsible users to earn rewards such as cash back or points. Credit cards also act as interest free loans in a pinch with grace periods ranging from 20-30 days for users who can pay the balance off when the bill comes due. Spending on a credit card should adjust according to one’s financial situation. Responsible credit card use starts with spending less than one has in their bank account month to month. Besides that you must try not to rack up your credit card bill. If you can avoid it, do not use your credit card at all, as this will just put you deeper into debt.
Try to pay cash for what you need and eliminate the things that you want (even if only temporarily). The horrible thing about credit card debt is that it is so easy for your debt to increase. Write down a list of expenses is also a way to overcome credit debt. It is very beneficial to know exactly where your money is going each month. Money seems to disappear before you even get your hands on it. Writing down a list of where your money goes will get you thinking about certain areas where you can save money. You can change your money habits by taking the time to understand where it is going. When you look at your list (and you should include what you are paying in credit card debt), you will probably be motivated to do what you can to try to hold on to more of your money. Lastly, pay down your credit card debt before you put money in a savings account. Your credit card interest rate is exponentially higher than what you gain from a savings account at a bank. Get rid of the credit card debt first, otherwise it will keep growing.
In conclusion, those who want to avoid bankruptcy do their best to avoid credit card debt to begin with. Bankruptcy can damage your credit score and cause other financial problems. On top of that, the financial strain can begin to take its toll on your relationships. Avoiding bankruptcy requires careful financial planning. We should create a budget and track our spending. Live within our means so that we are not acquiring debt. Each month, pay off our credit cards bill. We can use credit cards as part of our financial spending plan but we need to be careful to avoid carrying a balance. Besides that, we must set aside money for emergencies. That way, if unexpected expenses come up, we won’t be as devastating. Being debt free and having some savings built up and can go a long way toward helping us to stay away from bankruptcy and providing us with some of the cash flow we need. With careful financial planning, credit cards can be a helpful tool, rather than a path to bankruptcy.
Do not let something so useful become our downfall. The problem with credit card debt is that it is very easy to get into but hard to get out. (Some people associate it with a bad marriage, and it is really similar to it). To get into a credit card debt is even easier than any other debt, because the plastic is just there in out wallet all the time, as an easy solution, and we tend to use it as a “quick fix. Credit card debt reduction is although a different story, to get out of credit card debt you needs discipline and planning to reduce your outgoings and change your attitude towards your spending. Getting to a stage when you realize that you must eliminate your credit card debt before it gets out of control is kind of scary experience. When you realize that you need to find a solution because there is no other way out, and you cannot carry on piling up interest on your debt.
You can start reduce credit card debt with preventing it from increasing and paying off the capital or getting a lower interest credit scheme, therefore reducing your total credit card debt (credit plus monthly interest). Other than following the step by step instructions of your credit card debt consolidation plan, there are more methods to eliminate credit card debt. You can always seek assistance either at your own credit card company or an independent credit card debt specialist. Your credit card company wants their money back, so most of the times they are ready to compromise, give you a lower APR or freeze the interest if you agree a credit card debt consolidation plan. You must remember if you are not confident enough to negotiate a deal with your credit card company, there are many companies who are willing to support you and also offer free credit card debt consolidation consultation.
1. Vickie L. Bajtelsmit with Linda Rastelli, (2008), Personal Finance, Wiley Pathways. 2. Sarah Young Fisher and Susan Shelly, (2009), Personal Finance in Your 20s &30s, Alpha Books. 3. Curtis E. Arnold, (2008), How You Can
Profit From Credit Cards, FT Press.
1. A study of financial awareness among youths, Joyce K.H. Nga, Lisa H.L. Yong and Rathakrishnan D. Sellappan. 2. Malaysian consumers’ credit card usage behavior, Zafar U. Ahmed, Ishak Ismail, M. Sadiq Sohail, Ibrahim Tabsh and Hasbalaila Alias. 3. The influence of image consciousness, materialism and compulsive spending on credit card usage intentions among youthJoyce, K.H. Nga, Lisa H.L. Yong and Rathakrishnan Sellappan.
1. http://www.nst.com.my/top-news/easy-cash-turns-many-into-bankrupts-1.5518 2. http://thestar.com.my/news/story.asp?file=/2012/11/23/nation/12361423&sec=nation 3. http://voices.yahoo.com/credit-card-debt-one-cause-bankruptcy-7101354.html?cat=3 ARTICLE
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