18 July 2006

Credit Cards for 18 And Below

This is a good idea for banks, but I don't think it is such a good idea for society. The better idea for society would have been to promote the use of debit cards among the below-21 crowd and the "need-to-travel-overseas-but-cannot-qualify-for-a-credit-card" crowd.

A debit card is linked directly to your savings account. You can use it at any Visa or Mastercard merchant, but you do not borrow from the bank. Instead the money is deducted from the funds you actually have in your savings account (like when you use your ATM card). So no interest is charged.

If your kid starts bugging you for a supplementary card, consider getting him to apply for a debit card instead. If he needs to travel overseas without you, you can then top up his savings account with extra money to make sure he doesn't run short of cash while he's still overseas.
Business Times - 18 Jul 2006
Credit card privileges for teens in the pipeline

Changes follow amendments made to Banking Act

By LESLIE YEE

(SINGAPORE) Teenagers as young as 18 may soon fuel the next phase of credit card growth.

Banks are now issuing supplementary credit cards to those aged 18 and over - down from the previous minimum age of 21.

Also, banks are now issuing supplementary cards to persons regardless of age for purposes of overseas travel and not just overseas study. Users of supplementary cards can spend, with the bills going to the main account-holder.

In line with recently revised regulations by the Monetary Authority of Singapore (MAS), banks have made changes to guidelines on issuing cards and they are looking forward to good demand for supplementary cards from this new group of users. The revised guidelines allow banks to reach out to a previously untapped customer base.

.......

An MAS spokesman told BT: 'MAS recognises that credit cards are used increasingly as a means of payment, particularly when travelling overseas. As part of our ongoing review of regulations, we amended the rules on supplementary credit card issuance to allow these cards to be issued to individuals aged 18 years and above, or for the purposes of overseas travel.

'The aggregate amount of credit granted to the principal and supplementary cardholders remains capped at twice the principal cardholder's monthly income.' Banks will be careful when it comes to issuing supplementary credit cards to young people and they want young customers to be prudent in the use of their credit cards.

For those below 18, 'cards will be issued strictly based on needs', said a spokeswoman for DBS Bank, adding: 'We will be reviewing each application on a case-by-case basis.'
Another question occurs to me. Suppose I do not qualify for a credit card but my Daddy does. He could apply for a supplementary card for me and claim that I intend to travel overseas. How could the bank know whether this is true or not?

Having obtained the card, I could then proceed to use it in Singapore (or for that matter, overseas). I doubt if the banks are required to, or have the technological capability, to issue credit cards that cannot be used in Singapore but can be used overseas. And do you think that banks would really cancel your credit card if they check and find out later that you mostly use it in Singapore and had never, or had only occasionally, travelled out of Singapore? Possible, but I doubt it.

Effectively there may be a loophole here whereby people who don't earn enough to qualify for a credit card under Singapore's rules will still be able to get a credit card just by claiming (whether honestly or otherwise) that they need it for the purpose of travelling overseas. All they need is a parent or spouse (or possibly a boyfriend or girlfriend or best friend) to collude with them in that relatively simple lie.

33 comments:

Anonymous said...

Can the parents disclaim all liabilities in the event that the 18-yr old overspent during his holidays overseas?

Afterall, it was the bank who make the calculated risks of extending credit to the 18-yr-old.

The parents would probably have more wisdom to just let him have travellers' checks or a debit card!

Lau Min-tsek said...

Mr Wang said,

"Another question occurs to me. Suppose I am above 18 years old and I do not qualify for a credit card because my monthly income is too low. Nevertheless I apply for a credit card and claim that I am applying for the card because I intend to travel overseas. How could the bank know whether this is true or not?"

From what I understand from the newspaper article, the changes are for SUPPLEMENTARY CARDS. As such, the supplementary card applicant needs the prior approval of the principle applicant. ie, the principle applicant is acting as a de facto guarantor to pay the debts of the supplementary card holder.

I doubt that banks are going to check for proof of travel. After all, the business of the banks is to encourage spending and getting profits from a cut from the merchants or from interest from outstanding payments.

In any credit product from the banks, the banks need to assess the uncollectable debt exposure to the banks. They will factor in the bad debts from the younger card holders in calculating their interest rates and fees.

In such cases, the banks MAY decide that there are greater risk involved, since they are dealing with younger (and arguably less financially responsible) people here. The banks may then decide to issue higher interest rates for credit card debts for card holders less than 21 years old.

(note: I am not sure if it is possible to have one interest rate for a supplementary card holder and a different one for the principle card holder. It may be a unpopular move that will kill the product).

One thing that banks are good at is to adjust their interest rates to reflect their exposure. A frequent complaint is that local banks are generally too conservative and not willing to expose themselves to too much risk. So the banks are generally cautious.

But if you have a rich daddy to pay all your supplementary card debts, I think this is good business for the banks. In my point of view, there is very little increased risk exposure.

Anonymous said...

Mr Wang
what is yr email address? I wish to email you directly.

Mr Wang Says So said...

Well, the banks could raise interest rates. From an extremely 24% to ... an even higher 30%? As I said, the whole scheme is a good idea for banks but probably not a good idea for society.

Amended regulations say this:

"5(2). A card issuer may issue a supplementary card for a period specified by the card issuer to an individual who is below 18 years of age where the individual requires the use of the card for the purposes of his overseas travel.

(3) In determining the period referred to in paragraph (2), a card issuer shall have regard to what would be a reasonable period for which use of the card is required for the purpose of the individual's overseas travel."

Because of the parts in bold, the bank would definitely have to implement some process to get some info about the applicant's travel plans. How detailed that process is, and whether there needs to be a follow-up process (after the application stage) - well, I think that is something which the industry still needs to work out.

As for credit risk exposure, I think it definitely does run up even though the principal cardholder is liable and even though the overall credit limit on the main card & supp card is still the same. Reason is that you now have two persons, instead of one, utilising the same credit line.

Simple practical example is the kid who goes shopping with his new card and spends $15,000 on a new home theatre system, something which Daddy the principal cardholder wouldn't himself do. Daddy finds out later, and yes he is liable to pay the bank at the end of the month, but this unexpected debt (unexpected to Daddy) represents additional credit risk that the bank has on Daddy (because Daddy may be retrenched that month and be unable to pay).

Mr Wang Says So said...

Will be editing my posty slightly to reflect more clearly that Min Tsek's point about the card being a supp card.

murphyblue said...

Mr Wang please email me as I have a personal question for you.

Anonymous said...

I agree that this scheme is no good for the society especially I notice the bankruptcy for the younger generation is on the rise for the past few years. There are people as young as age 21 to be bankrupt for just few ten of thousand dollars.

This amendment is only applicable for issueing of supplementary card. I don't think the bank will check whether the supplementary card holder is travelling oversea. Anyway they just need to hold the principle card for liability as the contract/agreement is signed between the bank and prinple card holder.

Singaporean are already in debt for their whole life due to so call assets like car, house, renovation loan, lifestyle-induced spending etc...I guess our younger generation is heading for living on credit type of life...busy paying your bill so that can't free yourself to blog,...or debate with the ruling party, I guess.

JoE said...

yay, my 18-year-old nephew can now use his own credit card to bet football matches online!

Murphy said...

Mr Wang

please email me at murphyblue8@yahoo.com.
I have a question for you.

Eric said...

These supplementary cards are very common overseas. The banks love them. If a kid is the principle card holder, there is a relatively high chance that the kid will run up a debt and default. With a supplementary card, the kid may still run up a debt, but Mommy and Daddy is there to pay it. The bank doesn't have to worry about Mommy and Daddy defaulting because they adjust the limit to account for junior's spendthrift ways.

All this stuff about travel I think is just a red herring.

HairyFairy said...

i belive the government is only looking for more sources of money inflow. cuz i think this move is really unnecessary. they are only encouraging the citizens to 'use future money'. havent financial analysts all been talking about avoiding credit usage? and here they are, government lowering the age limit.

not a good sign. another thumb down for the new policy. so fast, and another wrong move comes along.

Lau Min-tsek said...

Here are my thoughts:

Is being debt-free good for society?

I am no economist, but being in serviceable debt may be what keeps the economy going. Being bankrupt is, of course, quite something else.

Being debt free is good for me. But that means that my spending is low. My savings are high and are locked into banks and the money does not circulate and hence does not stimulate the economy. OK, the banks can use my saving to offer low interest loans, which is good for business. But if everyone is like me and the general economy is in "savings" mode, who are the people the businesses are going to sell their products and services to?

I am thinking Japan. (someone with more knowledge is going to have a field day with this).

Back to the supp cards:

Issuing credit cards for 18 yo for the purpose of travel is actually another product being offered in the name of convenience.

The scenerio I have in my mind is like this:

I have a credit limit of $10,000 in my credit card. My 18 yo son wants to go for a 2 months holiday before NS. I signed for a supplemental card that will only last for 3 months. In my supp card I placed a limit of $6,000 because I don't want my son to overspend.

Let us look at the risk:

Risk to bank: the risk is assessed based on my ability to pay a debt. The credit limit is placed at two months my monthly salary. Since the risk has already been preapproved, the bank is already prepared to take the risk and I have a good chance of paying the debt. Also, the card is going to be automatically canceled in 3 months time. The bank does not need to look at my son's finances at all.

Risk to my son: My son's income and finances are not relevent here. It is mine that is relevent. There is no risk to him. I am the one paying.

Risk to me: I have already agreed with the bank with my exposure is going to be ($10,000 max). And on top of that, I place a limit on my son's spending at $6,000. Risk is clear and minimal (assuming I still have a $5,000 a month job......). Besides, it is only for a short term. If I pay all debts on time, I pay zero interest.

Now, if I don't give my son a supp card, what are my other options?

(1) $6,000 cash -- with all the attendent problems of carrying cash when travelling.

(2) $6000 traveller's cheque -- which by themselves charges a commission. Compare this to a credit card which attracts zero interest if I pay on time.

(3) Prepay everything like hotel bills, tour guide bills etc, and bring only a small amount of cash. Not practical.

(4) Wire money over (if possible) on a weekly basis. Quite troublesome and costly due to bank charges.

Looking at this, I must say that the idea of a credit card for my son for a short time looks very good.

Lastly:

If I am another faceless automaton working for a bank, my thinking is: how to get the most out of this product? How do I make it worth the bank's while to promote this product? Are we getting enough returns?

Using the above example: a client's supp card spend $6,000 and the bank gets 3% commission (for example -- may actually be lower) from the merchant, my revenue is $180. Well, we have an introduction promotion on now, so all application fees are waived.

Gee, is getting only $180 (before cost) really worth it? I have to handle the application, check his travel records, cancel the card after 3 months, deal with foreign exchange losses, chase for payment, store all transaction records for 7 years, etc etc etc. After all that, do I still make money?

And all this work is only for 3 months. The bank is not going to get additional business after the client terminate the supp card after 3 months.

Am I going to get volume business? How many 18, 19 and 20 yo is going to travel this year and spend big bucks?

All in all....... not a big profit generating business, IMO. But that is for the banks to decide.

OK, back to work now......

Eric said...

Lance,

What government inflows are you talking about? Private banks issue credit cards.

waterchild said...

This is probably the last frontier for the banks, since most adults already have at least 2 cards in their wallets.

Once the card is in the wallet, the temptation to spend is there. If my son asked me for one, I will not be giving him. He can always apply for a debit card, which gives him the same convenience that a credit card does without getting him used to the idea of 'spending before earning'.

Anonymous said...

I like the thought that spending contributes to the larger good of expanding the economy :)

No wonder the Americans spend beyond tomorrow ...

Seriously, as parents, I think I agree with Mr Wang. A debit card is good enough.

Anyway, I really don't think the banks will expend so much effort to keep track of your credit and card period.

They can only track your son's expenditure as and when bills are presented. And we know overseas bills can arrive weeks after your trip. The risks are still born by the poor parents, even if it is over your original stated credit allowed for your son.

Mrs Goh

Anonymous said...

Always remember: a person in debt is a slave to debt. Banks and bankers love nothing more than to enslave an entire people in perpetual debt.

But membership for the 'plastic cult' is marketed as fun, glamourous, hip. And plenty of trivial freebies (Singaporeans love this) thrown in. Many unthinking sheep bite.

Profiteering on interest charged on loaned credit is as old as the days of moneylenders in the mould of Shylock.

PC said...

To the last anonymous :

Wow.. I could certainly sense your strength of your convictioni in your statement..

Yes. Banks make money from interest income. Yes. It stands to reason that the more people have debt, the more the banks make.

However, that "enslaving" bit sounds a bit too emotional for me. Remember, there's such thing as good debt too. Think it was in the papers a couple of days ago about how Youtube was funded by credit card debt. Although I work in a bank, I'm none too crazy about the availability of easy credit. However, rather than blame the banks, let's look within ourselves and see how we can share with others what responsible financial management is.

Let's stop blaming others.

singaporean said...

Little wonder PAP rules Singapore. After all the talk about freedom, deep down inside, it seems like more than a few Singaporeans want the government to decide for us what is appropriate, and restrict us accordingly.

If individuals cant manage their own finances, they will be in trouble sooner or later. Credit cards merely cut the waiting time, and I suspect, a hole dug by a teenager is far more manageable than someone older.

IMHO, we should kill the credit card as a status symbol and let banks issue to anybody they want, with appropriate credit limits.

singaporean said...

And as a parent myself, which is worse: Wonder what your kid did with the pocket money this month, or have a nice statement that details exactly where he/she had been spending the money?

Which is worse? Have a child who would spend every last cent and then nag nag nag you for more, or test their ability to delay gratification by trusting them with a soft credit limit (a parent/child agreement that is lower than the card limit)?

Anonymous said...

anon (Tuesday, July 18, 2006 8:13:51 PM),

gahmen love nothing more than to entrap an entire nation whom they think are in perpetual debt to them

AA said...

It's a calculated attempt by the bank to get more $. Teenagers have more unrestricted spending habits, and so the chances of them chalking up higher expenditure on the cards is also higher.

Lau Min-tsek said...

I seem to recall an article saying that TIME considered naming the American consumers for TIME mag "Man of the Year".

Apparantly, they spent and spent and spent (and collectively went into debt) to save the world from a serious recession afew years back.

(oh thank you, American consumers, for buying more Osim massage chairs and Creative MP3 players!)

Point is, managable debt from a (macro-?)economic point of view may not be a good thing. But from a personal point of view, the less debt the better.

Of course, the most intriguing thing about the article was that there were no conspiracy theories of banks trying to "enslave an entire people in perpetual debt".

Nor were allegations that the PAP was trying "entrap" the American public with discount vouchers of Singapore Sling ever proven.

Lau Min-tsek said...

Typo: I meant "managable debt from a (macro-?)economic point of view MAY BE a good thing. But from a personal point of view, the less debt the better."

Sorry.

John Riemann Soong said...

the thing with debit cards is that if you lose it, you lose all the money in your savings account most likely (unless there are good samaritans out there...)

If you lose your credit card, you can just freeze it and revoke unjust charges following investigation.

soulburnz said...

I guess if you lost your debit card, you can make a call to the bank immediately to freeze it as well.

What worries me in the long run is that the endorsing of the younger ones with higher spending power.

To think that there are already people out there, for the sake of getting a credit card, when applying, including their bonus and OT so as to push up the minimum annual income to meet the bank's requirement.

And seriously, I think the norm under 18 shouldn't have much chance using the credit cards.

They can always use Nets.

John Riemann Soong said...

Kind of difficult with online shopping. Then again if it's difficult to purchase things online, it often turns one into a supporter of free software (free as in freedom) and a person who disdains the concept of copyright and intellectual property.

Maybe that's a good thing in a long run. (Serious.)

biased observer said...

I was 17 went I went overseas to study more than 10 years ago, and my father was able to apply for a supplementary card for me on that basis.

Mr Wang Says So said...

The rules have long permitted the issuance of supp cards for young folks going for for "overseas study".

What the MAS has done now is change "overseas study" to "overseas travel".

Anonymous said...

Can you tell me more about getting a debit card and a checking account?
i am only 15
Thanks

lastAutumn said...

Hey, I guess those cards for the young should be very far from low interest card, as the risks are enormous. Teens often believe the money they get with a credit card are not necessary to pay back.

Creditworthy said...

I agree that the young generation is easy to get into credit
card debts
.It's a proper way to get as much information as possible before applying for a plastic. Credit cards are for active usage in one's financial affairs so it's better to find the right time to use them with all advantages.

Syed said...

If you have good credit, then instant approval credit cards can work for you just as well as credit cards acquired by means of a longer application process. Plastic business cards

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