CREDIT CARD USE DURING TOUGH TIMES

The Philippine Star
02/20/09

The year 2009 is predicted to be one of the worst years on record for consumer credit all over the world.

According to the latest Credit Card Index results from debt watcher Fitch Ratings, late payments on credit cards in the U.S. topped record levels and defaults rose sharply to just below all time highs in January as consumers continued to struggle in a deteriorating economic environment.

The latest data, Fitch said, is consistent with previous indications that the US credit card issuers' performance would worsen further given recent delinquency and bankruptcy trends and the rise in unemployment levels.

Fitch anticipates charge-offs in the U.S. to breach 8 percent in the coming months and approach 9 percent during the second half of the year.
Charging off is the point when a credit card issuer writes off the account balance as a bad debt after a few months of non-payment. There will be continued attempts to collect whatever the borrower owes plus interest even if the debt is no longer counted as an asset in the creditor's books.

Because of the non-payment of debt, the delinquent borrower's name will be included in a list of those with negative credit standing that other creditors, including banks, will have access to.

Reduced spending

Banks and credit card companies are facing not just the problem of high delinquency. Reduced consumer spending, which is what is to be expected during economic downturns, also means reduced income for them.

In the US, losses for the industry could top $70 billion as an increasing number of American consumers are now deep in credit card debt.

According to a recent newswire report, there was nearly $1 trillion of credit and charge debt outstanding as of October last year, up more than 25 percent since 2003, citing data from the Federal Reserve.

This is on top of $10.54 trillion in mortgage debt.

That US unemployment rate in January surged to 7.6 percent, the highest since 1992, paints a grim outlook for consumer spending and on the ability of credit cardholders to pay debt.

Local picture

The latest available data from the Bangko Sentral shows manageable levels, with consumer loans growing by 13.4 percent in December after a 20.6-percent increase in November last year. The growth came mostly from credit card receivables which expanded by 20.5 percent in November, down slightly from 23.3 percent in the previous month.

Credit card debt accounts for less than 10 percent of the local banks' total loan portfolio.

According to many economists, it will take two years before the global economy returns to a normal growth trajectory last seen before the current global financial crisis. Amidst this gloomy global scenario, the Philippine economy is still projected to grow albeit moderately.

The country is finding itself still in relatively good shape compared to some of its neighbors although some Filipinos are now feeling the pinch of the crisis -- thousands have lost their jobs or gone on reduced work hours in recent months as a number of companies closed shop or downsized to cut operating costs.

And many more face the grim prospect of being laid off in the coming months.

Cautious steps

What does all this mean for an estimated four million individuals currently holding about 6.5 million credit cards in circulation in the Philippines, or for those still dreaming of having a credit card, and for the credit card issuers?

The good news is that the Bangko Sentral ng Pilipinas has slashed key interest rates and may further ease its monetary policy, which means banks and other credit card companies will have abundant liquidity available for lending.

The bad news though is that local credit card issuers are turning cautious these days in issuing new cards and in raising credit limits for cardholders. They are even mulling the possibility of lowering credit limits in order to minimize the risk of delinquencies which is naturally high in a period of economic downturn.

With the current crisis expected to last until next year, financial experts say it makes sense to cut down or settle all debts now. It is a choice between having peace of mind and living a life under pressure from mounting debt.

With the country's unemployed ranks swelling and economic growth slowing down, it is not hard to imagine many Filipino credit cardholders eventually finding themselves unable to pay bills and other dues on time.

Easing the burden

Completely stopping credit card transactions is not to the best interest of credit card companies. In many instances, giving credit card users some leeway to settle their accounts and allowing use of the card, although at more controlled basis, proved beneficial to both credit card issuer and card user.

Which brings us the crux of this column. Credit card issuers can do something to help ease the burden on consumers. Scrapping annual membership fees and surcharges imposed on credit cardholders will be a welcome relief.

Card issuers in the US and other countries do not collect annual membership fees. And yet, in the Philippines, issuers collect anywhere from P750 to P1,200 per principal cardholder, plus an extra P500 for every supplementary cardholder.

Scrapping or lowering fees and interest surcharges could also be considered. Local credit card companies charge users up to 42 percent in annual interest rate, or 3.5 percent monthly, which is on top of annual fees and late payment charges. This is almost four times the 11 percent average annual interest rate, or 0.91 percent monthly, being assessed by card issuers in the U.S. Bangko Sentral has taken steps to lower interest rates, but apparently this benefit is not being passed on to credit card users.

In the not too distant past, credit card companies employed imaginative marketing gimmicks to hook thousands of consumers, even those marginally qualified, to the use of the “plastic money.” Now, these companies should start thinking out of the box for them and thousands of their “hooked” clients to survive the ongoing financial tempest.

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.