05 January 2006

On Credit Cards and Cashline

Jan 5, 2006
Banks to end spending on credit line-linked cards
They will remove Nets use from ATM cards that draw on personal lines

By Kelvin Wong
THE days of being able to make purchases on ATM or so-called 'debit' cards which actually draw on personal credit lines are coming to an end.

No longer will consumers be able to charge and sign, or even use Nets on these quasi-credit cards, essentially reducing them to the sole function of cash withdrawal from ATM machines.

The change, which is being implemented by both local and foreign banks here, stems from a meeting which the central bank reportedly had with the industry in the middle of last year.

The Monetary Authority of Singapore (MAS) is understood to have argued that these cards are really credit cards and should therefore be governed by its rules on credit cards, including a cap on credit.

Credit cards are charged interest at 24 per cent a year while credit lines, which are meant as personal overdraft accounts, usually attract lower annual rates of between 13 per cent and 17 per cent.

Standard debit or ATM cards, which draw on savings accounts that have money deposited in them, are unaffected by the changes.

In a recent circular to customers, DBS Bank said it would end the Nets facility on its Cashline ATM card from Feb 5. This was due to 'recent market and regulatory developments'.

When contacted, OCBC Bank said it had already made the change for its EasiCredit customers from Sept 30 last year while United Overseas Bank said it would replace its CashPlus debit cards, which can be charged and signed on, with ATM cards over the next two months.

But United Overseas Bank added that Nets transactions will 'still be available to customers with credit or positive balances'. Purchases made this way do not draw on borrowed funds.

MAS' policy is that a card by any name that draws on credit for spending is still a credit card. As such, 'banks that offer unsecured credit facilities linked to debit cards must comply with the credit card rules', it said.

The most pertinent rule in this case is a limit on how much credit a bank can offer on its credit cards - double a customer's monthly salary.

Customers who apply for a bank's credit line that comes with a debit or ATM card are usually also offered a separate credit card.

But since MAS also considers the debit or ATM card to be a credit card, the two - credit and debit - are still collectively subject to a cap of twice a customer's monthly wage.

Faced with this, the decision by banks to disallow spending on their ATM or debit cards that draw on credit lines is then largely a commercial one.

Once these cards are no longer deemed to be credit cards, credit line accounts will have a separate and equivalent cap of twice the monthly salary. Taken together with the credit card, this is potentially, four times.

Banks merely said that the measures were to ensure that customers did not breach the twice-monthly salary cap on credit cards.
Mr Wang will explain. First, the MAS set a rule (specifying a limit on the amount that a bank can lend to a customer via credit card). Then the banks found a way to work around the rule (they lent to customers not just through credit cards, but through debit cards linked to personal credit lines). Now the MAS is stepping in again to close the loophole (declaring that such debit cards function like credit cards, and therefore are also subject to the original rule).

However, the heart of the matter still eludes MAS. The real crux is - how much should a bank be allowed to lend to a customer for his general spending? If the limit is set at twice his monthly expenditure, then in principle that should be the limit, whether the lending is effected via credit cards, debit cards, personal cash lines or whatever other tool.

Otherwise the banks will just come up with new ways to circumvent the rules again (if they haven't already). For example, let's just put aside all the debit cards for a moment. If a customer can draw on his personal credit line to make early partial repayment on his credit card, then effectively he is borrowing from the bank (on the personal credit line) to repay what he had already borrowed from the bank (on the credit card), and by making such early partial repayment, he frees up his credit card limit, enabling himself to borrow some more on the credit card.

So the root problem - customers being able to easily borrow more than is good for them (or the bank) - manifests itself again.

14 comments:

pleinelune said...

Now THAT is stupid. To me, a debit card is a way to buy things online without applying for a damn credit card. And since the money comes from my own account - I know how much I spend. It is a blessing, esp, for students like me.

PC said...

Plenelune

I think you misunderstand the whole idea that Mr Wang was trying to say.

He's not talking about Debit Cards per se, but debit cards linked to Personal Credit Lines.

By allowing their use, these debit cards become like credit cards, with lower carrying costs.

You can still use debit cards linked to savings accounts for your purchases.

PC said...

Oh.

Forgot to give my take on this.

Brother Wang, a large part of earnings from banks come from carrying costs of debt. Think you can read between the lines on this.

As far as MAS policies go, if there is evidence that the snowballing of debt is excessive, I believe it will be a matter of time before there will be a policy change, capping unsecured loans to 2x per month per bank.

The govt has taken a stand that one should exercise personal responsibility in financial planning... :o)

hugewhaleshark said...

So true. A single individual customer unsecured credit limit of 2x salary should do the trick.

Them evil banks. Problem is that when they pump you full of debt, you will end up hurting yourself waaaayyy before the bank feels the pain from higher credit cost. And MAS knows that.

PC said...

Banks are not evil.. they're just business people..

As for debt.. it's not really fair for us to cry murder when WE'RE the ones slashing our own wrists.

singaporean said...

I know of some US companies were started up with the founders maxing out their credit cards. How it could work is beyond me, although I suspect the interest rates for credit cards in the US is a lot lower than Singapore.

I also know of a businessman who hinted to having borrowed from loan sharks to put down the initial deposit to secure a big tender. I believe he made a nice profit even after subtracting what was due to the loan sharks.

The fact is that it is hard for most Singaporeans to obtain unsecured loans, and this could be one reason entrepreneurship is so dead here.

To close off all loopholes in the lending system may save the skin of those too foolish to manage their own finances, but 水太清则无鱼 (there will be no fish in clear waters), it will choke off options for others who have short term cashflow problems.

I myself applied for a mountain of credit cards so that I dont have to spend my wedding night counting money. My credit cards had been idle ever since.

Mr Wang Says So said...

Something to think about:

Why does a bank charge you 24% interest on a credit card, but only 13% on a personal cash line?

You're still you, you know, the same customer.

Maybe our financial experts PC and HWS would like to comment. :)

PC said...

There are a few ways of looking at it...

But mainly, the reason is that the Singapore consumer (or consumer association) hasn't made enough noise.. In the US, carrying costs for the credit lines are something like 18%.

If one was to examine the product specifications, one can argue that credit card users have a "interest holiday" period.. which means that one enjoys a period to defer his payments on his purchases. After that period, he can then choose to pay off or to carry the balance. For the benefit of carrying the balance, the charge is 24%.

In the case of the credit line, one does not have the option... draw on it and you get charged interest on the balance immediately.

It's all in the packaging / marketing I guess. However, if one was a savvy consumer, one would transfer the balance (from a higher interest credit card or credit line) to one of the many lower interest credit lines available....

Actually, if he was savvy enough to think through the issues.. he would choose to use the credit line to finance his purchase.. Of course, if he was REALLY savvy... he wouldn't spend what he doesn't have in the first place *wink*

Mr Wang Says So said...

Hmmm ...

Problem with this analysis is that if you use your credit card to get immediate cash (eg at a Cirrus or Maestro terminal), you get hit by 24% interest rate immediately too - no "interest holiday". Whereas if you use your personal credit line to get immediate cash, you get hit by only a 13% interest rate. Yet you're still you, the same customer, same credit risk profile. This looks illogical.

Then again, maybe the problem is that Mr Wang actually expects things to make sense, when the real world really IS illogical.

PC said...

Actually... the "cash out" facility is not meant to be used as a norm...

If one is to use the Credit Card facility.. charging and then paying off in full.. charging and then paying off in full.. you don't end up paying any interest.. now, that's the correct way to use your credit cards...

Like I said.. it's all about the marketing... and the consumers.. make enough noise, and the rates will fall.. IN THE LONG TERM *grin*

hugewhaleshark said...

Agree with pc. The difference is not logical and the banks are just playing off consumers' ignorance of cheaper financing options. If you were a prudent person, it would really surpise you how many people roll over their credit card debt.

OK the evil bit... I'm just saying that if you let market forces decide how much debt the banks are allowed to ply on consumers, it will pose a social problem. Hence MAS's restrictions.

Mr Wang Says So said...

Heheh. Mr Wang is very prudent. He pays all his credit cards in full by Giro and never rolls over a cent.

charles said...

I think the govt should make a better job at regulating Credit Cards.

Last week I had to explain to a friend the differences between the rolling interests in Credit Cards and a personal loan.

The two are completely different and she is looosing so much money on her credit cards.

But Singaporeans are not rational on the matter:

Credit Cards = Status
Splurging = Class

Spending on credit is not a problem, but you must know how to manage your interests. And you can trust the local banking system with all their noisy stands on Orchard Road to not tell the whole story.

The most common lie?
"Free" Installments on Credit Card.
The word Free sure brings attention, but in reality it will cost you more than 6% in "processing fees".

It will be a long long time before the govt allows CASE to go after its cherished banks.

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