Credit card crunch

The Straits Times
Nov 17, 2008 | 6:00 AM
Credit card crunch
More seeking credit counselling as incomes start to fall in recession
By Radha Basu, Senior Correspondent

TILL late last year, banking executive Lily Lim, 30, was living the high life, visiting fancy restaurants and splurging four-figure sums on frequent holidays and shopping sprees.

Then as her expenses sprinted past her income, the relationship manager thought she would become a property agent to cash in on the building boom.

The gamble failed.

The property market stagnated suddenly. And her monthly income, which, buoyed by commissions, could touch $10,000 at the bank, plunged to $1,200.

By April, her credit card debts mounted to $75,000 and she was unable to pay even the minimum sums.

'I was in despair,' said the business degree holder who approached Credit Counselling Singapore to seek advice on how to rein in her debts.

'I had no idea you could go from boom to bust so soon.'

It is early days yet for the recession, but job woes have suddenly overtaken overspending as the key reason for mounting credit card debts, show numbers from Credit Counselling Singapore (CCS).

More than 60 per cent of CCS clients this year cited 'job-related' causes as the biggest factor that drove them deep into debt, up from 43 per cent in 2006.

Overspending was the main culprit in 57 per cent of the cases this year, up from 52 per cent in 2006.

A non-profit organisation, CCS helps debtors work out monthly instalment plans to pay off credit card bills. It has counselled more than 3,000 people since it was soft-launched in August 2003 and 15,000 have attended its weekly talks on how to pay back ballooning debts.

As the economy heads south, the numbers of those turning up for help at CCS are inching up. Nearly 600 attended the talks last quarter compared to 325 during the last quarter of last year.

This month, the numbers are likely to rise further. The latest session, last Wednesday evening, for instance, saw nearly 80 attendees.

Young and old, sharply-suited or shoddily-dressed, they listened quietly and took notes as CCS assistant director Tan Huey Min held forth on ways to work out payment plans with creditors.

'Open mail from your creditors, answer calls, stop using the facilities and continue to pay whatever you can,' said Ms Tan.

Fuelled by wanton spending, credit card rollover debt in Singapore ballooned by $296 million to $3.3 billion in the 12 months from August last year.

That is a three-fold rise from the $94 million increase recorded in the preceding 12 months.

Ms Tan said she and her colleagues are anticipating a bigger demand for their services as the economy worsens.

CCS' head of counselling Lim Cheng Boon said a booming economy had caused many people to overspend in the past couple of years.

'The sudden recession - where a client or a spouse can lose a job or face a pay cut - is making matters worse.'

While most of the debtors are married and in their 30s and 40s, the number of spendthrift singles in the same age groups is also on the rise.

One of his clients, who is 44 and single, had her pay slashed from $12,000 to $4,000 in July this year, when business slowed down for the lifestyle firm she worked for.

Saddled with credit card debts of $288,000 - largely a result of her love of Louis Vuitton and luxury holidays overseas, lavish gifts for her extended family and interest - she landed up at CCS for help.

'With the easy availability of credit cards, often people forget that they are spending not cash but credit that will need to be paid back soon,' said Mr Lim, who has counselled more than 500 debtors.

'And with multiple cards, many don't know how much they spend every month.'

Any change in income can be disastrous, as marketing executive Genevieve Lee, 33, learnt the hard way. She used her credit card and overdraft facilities to pay $30,000 for a distance learning course. Shortly afterwards, she lost her job.

It took her nearly two years to find another job. By then, her debts had ballooned to $90,000. 'Since the economy was booming, I kept thinking I'd find a job soon,' she said. 'But I never did.'

Ms Teo is now on a debt management plan (DMP), under which she pays a fixed sum of $1,900 to her creditors every month.

During one-on-one counselling sessions, CCS helps debtors list out their income, expenses and surplus and work out how much they can afford to pay back the banks. Barring a few 'exceptional cases', like when a family member is seriously ill, the entire debt needs to be paid back in a maximum of five years.

Telecommunications executive Lawrence Wong, 27, was at the CCS office last week seeking help with credit-card debts of $58,000 he chalked up in less than two years, largely as a result of Internet betting.

'We have no money to lend - we are just a facilitator,' counsellor Yong Siow Ying, a retired bank manager, told Mr Wong.

After a two hour session totting up her client's monthly expenses versus income, she worked out that he will need to fork out about $1,020 per month to pay off his debts in five years.

Mr Wong, who is single, agreed to take on an additional weekend job. But it is not going to be easy. Since he is a relatively new customer, the banks may be unlikely to accept a five-year payment plan from him, warned Ms Yong, adding 'We are in no position to bargain.'

But her client is determined. 'I made a birthday resolution to take charge of my debts,' he told The Straits Times. The economy, he pointed out, was not getting any better. 'So I must start soon.'