Credit card debt much worse than usury

There is a staggering amount of debt made by Filipino consumers arising from the use of “plastic” or credit cards. In the same breath, management of this debt continues to be a challenge.

Credit card debt from the first quarter monitoring of the Bangko Sentral ng Pilipinas this year continued to rise, higher by 8.1 percent compared to the same period last year. This includes data from subsidiaries of banks in the credit card business.

In absolute amounts, total credit card receivables were P141.2 billion compared to P130.7 billion a year ago. It would be interesting to know the profile of these “plastic money” users, and just how much of this debt comes from “minimum payment” users.

‘Minimum payment’ credit card users

Credit Card Association of the Philippines (CCAP) says that about 55 percent of card users pay their monthly bills in full and ignore minimum or partial payments. If you have a credit card population of about three million, this means about half are in an undesirable cycle of indebtedness.

Simple math will tell you that each of these captive card users who merely pay the “minimum payment” amount would be holding an average debt of about P95,000 each, and for the majority of them the amount is most certainly more than what he or she each earns in a month.

Under this scenario, it takes little effort to conclude that this kind of debt will not be fully paid soon. At almost usurious interest rates of three to 3.5 percent, these cardholders are simply not going to be able to break away from the cycle of debt by continuing with minimum payments.

No wonder that credit card receivables that are overdue comprise about 15 percent of total debt, and that credit defaults in the Philippines is about triple the average in Asia.

With the Philippine Christmas season just a few days away, we can expect credit debt to further rise. Year in and year out, we are confronted by this increasing and sometimes addictive dependence on credit cards, and its subsequent mismanagement by users. Yet nothing much is being done to save misguided consumers.

Full disclosure of ‘minimum payment’ consequence

Last June, the Lower House announced that lawmakers had passed on third and final reading a bill that would compel credit card firms to indicate in their billing statements what cardholders would eventually have to pay should they decide to settle only the minimum monthly amount due, or if the credit card user is in the habit of deferring payment of their entire outstanding balance.

Unfortunately, nothing much has happened since.

In most billing statements sent to credit cardholders, the minimum amount or about five percent of the total outstanding debt is prominently displayed. To the guileless, or perhaps the desperate, this figure becomes the central figure guiding him in settling his monthly due.

Perhaps you and I are well aware of the pitfalls of paying only the minimum amount. But majority of credit card holders do not. And there lies the danger.

Pasig City Rep. Roman Romulo, the bill’s author, has come up with a good bill that deserves immediate attention by our lawmakers. Cardholders indeed have to be fully informed that it will cost them an arm and a leg if they settle only the minimum monthly payment required.

Warning notice to credit card holder

One of the more interesting features of House Bill 4655 proposes is to include a cautionary statement on every card billing statement, something like “Warning: Making the minimum payment only or any amount less than the total amount due for the billing cycle/period will increase the amount of interest and other charges you pay and the time it takes to repay your balance.”

Romulo says that credit card firms have been cleverly pushing consumers to settle only the minimum monthly payment required so that the banks are able to collect larger interest payments especially if the cardholder keeps the outstanding balance unpaid for a longer time.

HB 4655 also wants the credit card bills to reflect the number of months that it would take to pay the entire amount of the outstanding balance if the consumer pays only the required minimum monthly payments and if no further advances or purchases are made.

The billing should also reflect the total cost, including interest and principal payments, if the consumer pays only the required minimum monthly payments.

Breaking the debt cycle

In order to help the cardholder break away from the cycle of debt, HB 4655 also proposes that the bill states what monthly payment is needed for the consumer to make for a period of 36 months to finally get out of the debt trap. This assumes of course that the cardholder will no longer swipe the card during the “rehabilitation” period.

As an additional help to those who want to kick the undesirable habit of using the credit card, HB 4655 also seeks to inform the cardholder of the total cost, including interest and principal payments, of getting into the rehab mode.

Romulo says that the approved bill will give more meaning to The Truth in Lending Act, which protects the people from lack of awareness of the true cost of credit by assuring full disclosure of such cost, with a view to discouraging the uninformed use of credit.

The bill would also amend the 1998 Access Devices Regulation Law, or Republic Act 8484. At the same time, the bill proposes to put all credit card companies directly under the supervision of the Bangko Sentral. At present, only card issuers affiliated with banks are supervised by the BSP.

While more than a million affected credit card users wait for this piece of legislation to go through the mill, they can start computing just how much they are shelling out from keeping their debt payments at minimum levels. There are many Internet sites that offer sound advice.

All that is needed next is the firm resolve of the affected cardholder to kick the habit. It will be a great help though if all the provisions found in HB 4655 make it to the final version that is the law. The sooner, the better. –Rey Gamboa (The Philippine Star)