Low-income families can benefit from access to credit cards

RICHARD HARTUNG

JANUARY 8, 2015


For anyone who has a credit card, buying the latest gadget or going out for dinner is easy even when they do not have enough money. They can buy now and pay later.

For more than half of the residents here in Singapore, however, that easy lifestyle is not possible. Nearly 60 per cent of individuals here have an average annual income below S$30,000, said the Department of Statistics, and current regulations do not allow them to receive a credit card.

[According to Salary.sg, if you earn $2,500 a month or $30k in 12 months, you are in the 41.5th percentile. That means you earn more than 41.5% of the resident population. And if you count 13th month salary, the monthly salary should be about $2,300 and about 40% or less. So it is not 60% of the population unable to have a credit card. Maybe closer to 40%. Unless you count the 8% of retiree age Singaporeans. More on that later.]

This puts lower-income families at a disadvantage. When there is a sale on something they need, they have to wait until they save enough and may pay a far higher price. If their child would benefit from just a little more tuition before an exam or would learn by participating in more activities at school, they need to wait until the family has saved enough because they cannot use a credit card to pay for the education over time. And if they want to use credit to buy medicine, get insurance or make payment in an emergency, they can only use the money they have rather than using their card and paying later.

Even though the Monetary Authority of Singapore (MAS) does allow banks to make loans to people with incomes above S$20,000, banks are less likely to offer short-term loans for daily necessities. The result is that these families have few good options.



One alternative is to borrow from moneylenders, who are likely to be more flexible. However, moneylenders’ interest rates of about 20 per cent per month can cause these families to get trapped in debt, and proposals to cap the interest rate moneylenders charge at a still-high 4 per cent per month have been attacked.

Another alternative, loan sharks, could result in even higher interest rates. Credit card annual interest rates of 24-28 per cent are significantly lower than either option.

The result is that low-income families end up lacking basic access to financial services common elsewhere. If they lived in Australia, Hong Kong, India or other countries, there is no regulatory constraint on their obtaining a credit card.

Perhaps it is time to consider a change and let anyone here receive a credit card.

THE CREDIT CARD OPTION

Nearly a decade ago, the MAS did partially consider this option. It looked at reducing the long-standing minimum annual income requirement for credit cards from S$30,000 to S$20,000, noting that advances in risk management practices, the establishment of the consumer credit bureau and improvements in banks’ risk assessment processes made it less likely that borrowers would take on too much debt.

Three years later, in 2009, policymakers decided to keep the minimum income requirement at S$30,000, though without an explanation of why they made that decision despite the advances they mentioned earlier. Only consumers who are above 55 years old or who have a credit limit of less than S$500 can be granted an exception.

[So if you are a retiree (above 55 yrs) you can get a credit card.]

If the minimum income requirement were removed, low-income families would have greater access to much needed credit.

There are concerns that access to credit cards could lead to over-spending. Yet, contrary to popular opinion, and in line with what microfinance companies have seen in other countries, lower-income families can be good at managing their money.

While about 3 per cent of cardholders have debts exceeding a year’s salary, most of them are not from the lower-income pool. As Deputy Prime Minister Tharman Shanmugaratnam said recently, close to 65 per cent of them earn above the median wage and more than half hold tertiary education qualifications.

Bankers here also said default rates for lower-income borrowers are often not much different from those borrowers with average incomes, and banks can decline higher-risk applicants in any event. That is not to say there is no risk at all. While many lower-income consumers may manage credit well, some consumers could get into trouble if they do not manage their finances effectively.

Yet a variety of practices could mitigate the risk.

Banks use credit bureau data to avoid issuing credit cards to consumers who already have one, reducing a risk recently indicated as a cause of over-indebtedness. If there are concerns about how these cards would be used, banks could restrict usage at places such as nightclubs or bars.

New MAS rules next year can also reduce risks, as banks will not be allowed to grant more unsecured credit or issue more cards to borrowers who have total unsecured debt that exceeds their annual income or who are more than 60 days late in paying their bills.

Leveraging initiatives such as MoneySENSE, the Government’s national education programme that helps consumers acquire financial skills, or requiring applicants to learn from credit education videos could help with money management

[Right. That would be SURE to work.]

If cardholders run into trouble, banks could follow practices the Hong Kong Monetary Authority recommends and quickly reduce the credit limit, freeze the remaining available credit limit or block the cardholder’s credit card from further transactions. Credit Counselling Singapore could also assist those who run into difficulties.

Simply allowing banks to offer credit cards to lower-income borrowers does not mean that every applicant would be approved. Indeed, some applicants may have poor credit records or make too little to pay their debts, so a bank might still decline their application.

Still, significantly more families could end up with a credit card that could make the difference between paying potentially ruinous interest rates, especially during emergencies, and more affordable borrowing.

While some banks may not want to offer cards to everyone and it is still possible that some consumers could run into trouble when they use their credit cards, removing the minimum income requirement and allowing consumers to obtain credit cards so they can borrow at more reasonable rates would bring a multitude of benefits to the people who are most in need of a little credit.

ABOUT THE AUTHOR:

Richard Hartung is a financial services consultant who has lived in Singapore since 1992.

I agree that allowing the lower income earners have credit cards would be helpful to them for the reasons in the article. 
However, I worry that the banks may take advantage of these vulnerable clients. 
Unfortunately, the POSBank is not longer "The People's Bank" or the common Singaporean's bank. 
What is needed is a micro-financing or People's bank (non-commercial, perhaps a co-operative bank?) to provide credit facilities to the low income earners.
I would suggest NTUC Income is a possible candidate, but one wonders if they may be seen as too "government"?