By San Peng
IT started innocuously enough. When Gaya* (not her real name) landed her first job after graduating with a Bachelor of Science, she felt like a ‘proper’ grown-up living in the city. The feeling was reinforced when a foreign-owned bank into which her salary went sent her a ‘present’ – a pre-approved credit card with a RM2,000 limit.
Before long, an ‘adult’ Gaya found herself shopping for clothes, furniture, gifts, kitchen ‘stuff’, groceries, enjoying dinners and movie dates, courtesy of a piece of plastic. In less than two years, she was in debt to the tune of RM20,000. Desperate, since she could only pay a minimum of RM150 a month, Gaya ‘froze’ the credit card. She chucked it into a plastic bag and left it in the freezer. It has been lying there for the last four years in a very symbolic manner.
There are many Gayas in this country. The debt snapshot of Malaysian households has been pretty consistent. A 2007 Bank Negara paper on housing debt showed that the composition of debts was housing financing, automobile loans followed by ‘unsecured’ credit card financing. The latter is part of consumer loans and, between 2001 and 2007, outstanding credit card loans grew by an average of 17.8 per cent. At the end of 2007, credit card loans accounted for more than five per cent of total household debt.
Six years later, Bank Negara governor Tan Sri Zeti Akhtar Aziz sounded the alarm bell again. In July, Bank Negara implemented a set of measures, such as limiting the maximum tenure of personal loans to 10 years and property financing to 35 years, and prohibition on the offering of pre-approved personal financing products, to curb the rise in household indebtedness. Zeti disclosed that as of March, the ratio of household debt to gross domestic product (GDP) in Malaysia grew by 13 per cent to 83 per cent from 70 per cent in 2009, the highest level for developing countries in Asia.
Our debt-to-household-income ratio shows that the amount owed is 1.4 times incomes – a ‘trend’ that is worrisome when it is broken down to figures. Roughly, household debt rose by 12.7 per cent last year while GDP growth was 5.1 per cent or roughly half of the growth in debt. If Malaysians continue to accumulate debt at this rate, the likelihood of households defaulting and heading towards bankruptcy rises exponentially. The picture for consumers and the economy is not pretty.
Gaya’s action of freezing her credit card was borne out of extremity. She was 25 and fed-up with struggling to pay the rent, car loan and an albatross hanging around the neck – her credit card balance. “I had to take extreme measures because I was afraid every month when I saw the credit card statement,” says Gaya.
“I was naive and everything was so tempting. When you land your first job, you think you have to appear well-dressed and be a bit more sophisticated. With a credit card, it was easy to swipe first at the mall and worry later.”
To her credit, Gaya discovered that it was possible to live without a credit card. Unlike the United States, where it is estimated that there are 1.5 billion credit cards in circulation, Malaysia is still relatively ‘backwards’ with regard to the use of credit cards for things like building a credit score. Many Malaysians lack financial discipline and accept debt as a part of life. But it’s all right to be a contrarian.
So how does one go about ‘freezing’ credit cards? For starters, you can give up the plastic for a short period – you could ‘hide’ the card and pass it to someone for safe-keeping. Using cash to pay for purchases often forces you to rethink a purchase. Is that shirt necessary? No. Back it goes on the rack. Studies also support the finding that consumers tend to spend more when paying with credit cards than when paying with cash.
And what about when it comes to booking cheapie air travel deals and hotels? In the case of airlines, a few websites will accept cash transfers via a banking portal. Some also accept debit cards backed by Visa or MasterCard. Many online merchants also accept cash on delivery.
The best thing about living without credit cards is that it allows a consumer to focus on other financial matters, such as paying off the mortgage or car loan. For those with serious debt problems, Bank Negara’s Credit Counselling and Debt Management Agency provides financial education on the proper use of credit and basic money management, such as budgeting.
The key to living without a credit card is to plan, plan and more planning. From holidays to healthcare, these items must be budgeted for. Use an envelope system with money set aside for marketing, entertainment, phone bills and everything else. Keep a spread sheet and track your expenses.
The bottom line is that credit cards are not a right; instead, they are a privilege. If you are like Gaya and have little control over your spending habits, it is best to say ‘no’ when your bank sends you a pre-approved credit card because ‘you’ve been such a good customer’.