03 September 2007

Low Limit Credit Cards

I was writing about blog banner ads when I got distracted and went on a roll writing and writing. Before I realised it, I was 1 page deep already. Amazing what you can do when you let your heart take over.

Anyway, I decided to extract this and post it as a separate entry as it was a great digress from what I wanted to say in my previous entry and a topic like this deserves its own place in the blog.

However, the following is on a AFAIK (as far as I know) basis and may be grossly inaccurate. Still, this is the way I see it and so I ask if you read it with an open mind. I welcome all comments be it agreement or disagreement.

There is a reason why the Monetary Authority of Singapore had imposed (or merely a guideline?), as far back as the 80s, a minimum SGD 30,000 p.a. income before a bank is allowed to approve an application and to cap the applicant's credit limit to twice the applicant's monthly salary. Looks like the MAS is loosening the grip on this rule and hence the new low-limit credit card.

1) One argument was that we have to evolve with the times and with internet transactions getting more and more common, it does make sense to have a tool for you to make payment. Yes, I agree to a certain extend. Yes, you do need a card to make purchases on the web but No, it does not necessarily mean a credit card. A debit card, in my opinion, will do nicely.

2) Then there is mention whereby there is little risk as the credit limit is SGD 500.00 and that once you hit the limit, this credit facilities is suspended to prevent you from falling further behind. Yes. 500 bucks may not be a lot of money for quite a lot of people but has anyone stop and think about the interest rate on the roll-overs? We are most familiar with the "2% per month" tactic as a disguise that the real number is 2% x 12 = 24% per annum in regular credit cards. This particular card, due to the unsecured nature, is 5%* per month i.e. 5% x 12 = 60%!!

* can someone verify this?

Granted that you are capped at $500 but it doesn't mean that the clock on the interest accrual will stop with it. No. It will keep counting. Imagine, an outstanding balance of $500 for an entire year. The interest would be $300 i.e. you will then owe $800 in total! Oh and did I mention that there is legal costs involve if the bank were to haul you up to court?

Then again, court proceedings for a mere $800 is probably not going to happen but most of the time, there would be some kind of repayment arrangement settled out of court. Question is, why are we letting the banks earn this type of money?

The next question is why are the banks even lending money to people with no means of repaying? I am directing this to students who's only source of income (if you can even call it that) comes from their parents in the form of allowance. I have no qualms with people who are working (and that includes those who work and study part time) to apply for the card. At least they have the means to repay. For these students who are in the majority i.e. given allowance by the family, perhaps a supplementary card would be more apt?

3) The third "justification" is that this would provide a tool for the kid to learn how to manage money. Er... exactly what are we trying to teach the young by giving them a card and say "here, take the card and spend whatever money you have on you and $500, then later figure out how to pay back the $500 that you do not have in the first place and no means to repay it".

If you want to teach the young to learn the value of money, giving them a credit card doesn't make sense. I think teaching them how to earn far outweigh teaching them how to spend.

A friend said, better to let them suffer a $500 burn then a $5000 burn in future. My question is, why the need to be burnt? Can't we just teach them early about the pitfalls so as to avoid falling into this trap? Is there no other way to learn but the hard way?

A debit card or atm card, if you ask me is better for them. You spend only what you have.
Perhaps it is my own principle not to spend money that you do not have.
Am I making sense?

- Voxeros

1. Chocolate gal left...
Monday, 3 September 2007 8:08 am
i think best way to teach kids how to manage money is from young, ask them save lots lots in piggy banks.... sorry, my method very traditional... :p

2. JayWalk left...
Monday, 3 September 2007 8:25 am :: 
Chocolate Gal: I remember when we want something we used to save for it. These days in the age of "I want everything now!" culture, the credit card with its buy now, pay later scheme is very very tempting.

3. r3gular left...
Tuesday, 4 September 2007 3:08 am ::
I think I'm gonna apply for one.
I think it's generally on the applicant and his/her value on money. Some may argue that it's a form of cash flow for student who don't want to ask for more allowance from parents ( eg, pay with card, then pay back with next month's allowance ).
I think if you have control over your finances and spend wisely, why not?

4. JayWalk left...
Wednesday, 5 September 2007 12:54 pm :: 
r3gular: Well, the keyword here is "IF". If you have control over your finances. Ask all of those who had lost control. I'd bet you they all thought that they had control when they signed the dotted line on the application form.

I am not saying that you will lose control but I just merely say there once you apply for one, the risk starts.

5. Bellatrix Lestrange left...
Wednesday, 5 September 2007 10:20 pm
Credit Cards are all risky when you do not manage your finances well. Even for me, although I am earning a decent living with the ability to get a normal credit card, Louis Vuitton, Tiffany, Aigner and That CD Shop which are all a stone's throw away are very much of a temptation for me. However, I will choose to pay for purchases in cash, if I have exceeded 20% of my pay on credit cards for the month. That is the rule of thumb. Nothing more than 20% of my pay.

6. JayWalk left...
Thursday, 6 September 2007 9:15 am :: 
RedQueen: In the Murphy scenario, at least you still have the means of recovering the debt, albeit via a long and not to mention high interest path.

What recourse does the non-income student have?

7. Bellatrix Lestrange left...
Thursday, 6 September 2007 11:06 am
Well, people learn through 3 Ways, 1) Through Advise from Friends and Elders 2) From being the onlooker of the experiences of others and 3) Personal Painful experience. Most of the time, people learn from No 3 due to ego and what nots. Learning from personal painful experience makes you grow up faster... Its a phase in life everyone has to go through..

8. JayWalk left...
Thursday, 6 September 2007 5:05 pm :: 
RedQueen: Yeah, in a way, we have this lemming tendency to want to run smack into the wall but still it is no reason to stop us from trying to educate others.

9. Zhe Bin left...
Friday, 7 September 2007 7:17 pm
Yes you are, cos I also think debit card is the best. It eases transaction as easy as a credit, and for people who are not confident of repaying every cent of their expense monthly, do not use a credit, because you will be paying more. Simple enough logic. However, I must also say that if you can pay the loan, why not? Credit has its rewards and perks.
I also agree that it's not necessary for your child to "help you spend" $500 to get him to learn the value of money. Quite funny.

10. JayWalk left...
Saturday, 8 September 2007 1:10 am :: 
ZheBin: Yes, credit card should be a tool of payment and not to be used as a form of loan. I am not saying that borrowing money from the bank is wrong but at their exorbitant rates that they charge for credit cards, you have plenty better alternative out there like an overdraft facility where the interest rate is more sensible.

11. Winsor left...
Monday, 10 September 2007 12:22 am ::
I'm a teen too, an outgrowing one actually. I've thought of getting one of the youth credit card, it might seem little initially, $500. But I recalled when I had my debit card and how my account went spinning down like a landslide. haha! (now I've a separate savings bank account and another expenditure account with the debit card attached)
It is really a risky thing, having a credit card. Imagine me, spinning off control with even my debit card, have a credit card. It'll be $500 monthly, scary.
I only realised the impact of % interest has on my loans only after this read. 500 - 800 is scary enough. haha! no credit card for me at the moment. haha!

12. JayWalk left...
Monday, 10 September 2007 8:59 am :: 
Winsor: Welcome to the blog, Winsor! Glad to have you here.

First off, you were lucky to be holding the debit card when the landslide occurred for when the account reaches zero. You are able to close the chapter on it. Had it been the credit card, then my friend, your nightmare has only just began.

Anyway, my example of paying $300 interest on a $500 loan is an extrapolation to give you a better perspective when in actual fact, the banks would never let you drag the loan for such a long period of time.

They should be all over you by the second month and it would be them dragging you and not you dragging them.

Or yes and one last thing. When you drag, you are merely dragging your feet. When they drag, it's your entire body they are dragging....

.... across the asphalt, rocks, broken glass, snake pit, molten lava.... ok.. you get the idea.

13. Winsor left...
Tuesday, 11 September 2007 12:08 am ::
yea man, it's scary. they're even less compassionate than the loansharks.
And you've quite an illustrated description of the pains and sufferings of being on a loan. haha!

14. JayWalk left...
Tuesday, 11 September 2007 7:53 am :: 
Winsor: The banks are able to bully you coz they have the law behind them to do whatever they want with you.

Q: What is the difference between a loan shark and a credit card company?
A: One of them is a blood sucking, bottom feeding scum, that when you are not careful, will inflict a fate far worse than if you were burning in hell.

15. merryfeet left...
Monday, 17 September 2007 12:32 am
I agree. (: I read about this clear card thingum from citibank, I was really tempted to get it. But then, having worked at a bank and knowing how %interest works against the interest of the customer (it's damn scary, i heard of the stories from a custormer), i decided that I wouldnt even try asking for permission to apply for that card. Like Windsor, I'm an outgrowing teen too. Hha. Fully responsible for my own expenditure.
With my current debit card, I'm managing my finances rather well, using it 95% of the time as an atm card i.e., withdrawing certain amount of cash each time and use it like scrooge. :P It is true, that no one is as ready to spend cash on hand. That's why coupons for funoramas come about, aint it? (=

16. JayWalk left...
Monday, 17 September 2007 11:35 am :: 
Merryfeet: It is obvious that this card is targeting young at the age where we all want to act like adults.

Again, I say for young working people, this card is fine. I am against marketing this to students without the means of generating income.

Credit card should be a tool and not a loan facility.

17. merryfeet left...
Monday, 17 September 2007 12:59 pm
Actually it depends. Marketing it to students is one way of making sure that they earn their revenue by interest on overdrafts, since, hypothetically, students can either not have enough income to pay for all that they covet after, or they have loaded parents who pay for all their whims and fancies, even exceeding $500. In the latter case, these kind of students wouldn't even bother applying for this card. They woul have gotten their sup-cards. (((:
Guess they would learn their lessons if they are tempted and then burn fingers. :P

18. JayWalk left...
Monday, 17 September 2007 3:08 pm :: 
Merryfeet: Ahh... Smart girl in da house!! The person most likely to be unable to pay his/her credit card bill is one without a steady source of income. The reason why this card is launched is to target those who are young, cannot control spending AND their parents refused to give them a supplementary card simple because of the earlier 2 reasons.

By lowering the age limit, the bank is saying "Hey come and apply, no need to tell parents and ask for permission anymore! Bypass them altogether!" <-- referring to those who are students and above 21 years of age.

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