Bank Negara’s role in creating more credit card debt

No More Automatic 20-day Interest-Free Period for Credit Cardholders

Credit card debts will increase when the 20-day interest-free period (the grace period where purchase will not be charged interest) will no longer be automatically enjoyed by all cardholders.

Interest Free No More

Cardholders have been informed that from  1 July 2008 (for one bank it is 1 May 2008), only those  who make full payment of the previous month’s outstanding balance before the due date will get to enjoy the 20-day interest-free period. 

For those who make only partial or minimum payment on the previous month’s outstanding balance, interest will be charged on the day the new purchases are posted to the card accounts.

For example, Mr Tan’s July 2008 card statement shows an outstanding balance of RM2,000 but he repays only RM1,000. On 15 August 2008, he makes a RM800 purchase, which is eventually posted to his card account on 18 August 2008.  Since he does not settle the July statement in full, interest will be charged on the RM800 transaction from the posting date, ie from 18 August 2008.

Only if he had paid the outstanding balance of RM2,000 in full will the RM800 purchase not be charged interest.

Thus if the new ruling on the interest-free period comes into effect, cardholders will lose out. 

For  the banks it will mean another source of easy income  as on average only one-third of cardholders settle their outstanding amount in full every month.

Bank Negara must have amended the 2003 Credit Card Guideline so that the banks may introduce conditions for enjoying the 20-day interest-free period.

Clause of 10.2 of the Guideline says that all retail transactions shall be allowed an interest-free period of at least 20 days from the posting date of such transaction, regardless of the total outstanding balance in the credit card account.

The new ruling regarding the interest-free period must not be allowed to proceed. Bank Negara must revert to the status quo and make the 20-day interest-free period available to all irrespective of whether there is any outstanding balance in the previous statement.

Minimum Late Payment Goes Up

1 July 2008 is also the date when the minimum charge for late payment goes up.

Cardholders are expected to make a minimum repayment amount of 5% of the monthly total outstanding balance each month.  Those who fail to do so will be charged a late payment fee.

This late payment fee will also soon be raised.  From the minimum payment of RM5 or 1% on the minimum payment due (whichever is higher), it will now be increased to RM10 or 1%, whichever is higher (subject to a maximum of RM100) on the outstanding balance as at statement date.

Being late on payment by just 1 day will now cost double for those whose outstanding balance is not more than RM500. Only those who owe more than RM10, 000 will benefit because the maximum late payment fee is now capped at RM100.

But most of all why is there a need to double the minimum payment from RM5 to RM10?

On the other hand we think that there are other issues which Bank Negara should look into as they, in their own way, act as contributing factors for the credit card debts. These factors like the credit limit and the high interest rate are discussed below.

Credit Limit

Banks should not be allowed increase cardholders’ credit limit at its own discretion.  By doing so they are tempting cardholders to spend more.

There are cardholders who are not interested in the increase because they feel that the present limit is more than sufficient.   Others are not interested because they do not want to be tempted to spend more. A high credit limit also means that they stand to lose more if the stolen cards are used to run up bills.

Though cardholders can reject the increase, few will take the trouble to inform the bank. 

Once the cardholder continues to use the card he is deemed to have consented to the increase.

We should emulate the practice in Australia, where a bank can only increase a customer’s credit limit only if the customer requests it or consents in writing. 

At this juncture cardholders should also realise that the presence of the credit limit does not mean that they can never spend more than the limit.

This is not a real limit as the banks allow you to exceed their credit limit (to a certain extent), but ask you to pay a RM50 fine for doing so. 

One cardholder found out the hard way when he was charged RM50 because he had exceeded his credit limit by around RM90.  He had assumed that he could never spend more than the credit limit until he discovered the RM50 fee in  his card statement.

Secured Risk

Consumers have been told that interest for credit card loans are high because they are unsecured loans, unlike, say housing loans, which are secured against the properties.

However, this is not quite true.  Credit card debts cannot be considered  unsecured because there is a clause in the agreement which allows the banks to transfer funds from the cardholders’ other accounts with the same bank to pay off the card debts.

Examples of such clauses are:

Malayan Banking Bhd

“Maybank may at any time and without notice nor assigning reason thereof set off or transfer any monies standing to the credit of the Cardholder’s account with Maybank of whatever description and wherever located towards the reduction and/or discharge of any sum due to Maybank under this Agreement.”

Maybank does not even have to inform the cardholder that it has transferred money from other accounts in any of its branches to settle his card debt.

Standard Chartered Bank Bhd

“The Bank has  the right to combine or consolidate all or any of your account/s with the Bank of whatever description, whosesoever located and whatever currency, to transfer any sum to credit of the Card/s account/s for payment of any sum due to the Bank under this Agreement.  Where such combination, consolidation, set-off or transfer requires the conversion of one currency into another, you hereby authorise the Bank to effect the necessary conversion at the Bank’s prevailing exchange rates, which shall be determined by the Bank at its sole discretion.”

The bank can use one or more of the accounts to pay off the debt. The right to transfer funds covers even accounts in foreign currencies.

OCBC Bhd

“The Bank shall at all times so long as any money may be due on the Credit Card Account have a right of combination, set-off or lien in respect of all monies now or hereafter standing to the credit of the Cardmember on any banking account (whether savings, current, deposit or otherwise and in whatsoever and any other currency or currencies)  or available credit lines to the Cardmember at any branch of the Bank wherever located or any other  monies whatsoever held by or on behalf of any of the branches of the Bank for the account of the Cardmember (including but not limited to any proceeds from the realization of any security given by the Cardmember to the Bank)…”

Here the bank can even use any credit facility granted to the cardholder to settle the credit card debt.  Also any security held by the bank which is sold off can be used to settle the credit card debt.

Therefore if the cardholder’s house is auctioned by the bank (because of non-payment of housing loan instalments) excess proceeds from the auction can also be used to pay off the credit card debt.

From the examples, we can see that the credit card debts are pretty secured.

Thus a cardholder who has other accounts with the same bank should be charged lower interest rate as his loan is considered a secured loan.