Malaysians, Beware The Credit Card Trap

This is a very important article from today's Channel Newsasia, which all of us should read and keep in mind before using credit cards.

Consumer credit card lending in fast-growing Asian economies in recent years has been marked by sharp boom and bust cycles that can jeopardise financial stability, a report by the Bank for International Settlements said Monday.

The use of credit cards in many Asian markets increased three to six-fold between 1998 and 2005, while the average credit card balance per head grew by about the same amount, a study in the June 2007 BIS's quarterly review said.

Banks took advantage of the growth in consumer markets to compete for high yield but riskier business among less wealthy cardholders, by reducing lending standards and making consumer credit more easily available, it added.

That helped fuel consumer spending but also produced a rapid build-up in household debt, with a "disproportionate concentration of debt burdens among riskier card holders," the report found.

Cardholders later started to default on repayments as their debt accumulated and they became overstretched, prompting the introduction of tighter lending standards that suddenly stifled the private credit market and affected the economy. "The bottom line is that, as consumer finance becomes an important part of Asia's financial system, policymakers need to better understand the associated risk and be prepared to respond," the BIS report said. "Credit card lending represents new opportunities but increases risks to the financial system," it added.

The BIS, known as the central bank of central bankers, highlighted three examples of boom and bust cycles, in Hong Kong in 2002, in South Korea in 2003 and in Taiwan last year. The report estimated that one-third of all card lending books were simply written off after the lending booms swung to bust, in order to cushion the shock.

By comparison, credit card lending in Malaysia, Singapore and Thailand has so far shown a more steady pattern of growth, the report said.

Since the Asian financial crisis in 1997, local bank lending has been marked by a shift to consumer finance, with lending to households outpacing the increase in total bank loans to other markets such as the corporate sector. That was spurred by weak demand for corporate loans but also by government policies, including an easing of monetary policy to revive the economy and financial deregulation that expanded the number of lenders, the report said.

The BIS said more should be done to detect imbalances such as a rapid growth in indebtedness early, even while economic growth is sustained. It also called for more transparent information on consumer credit markets, and for strengthened supervision and credit limits to coincide with deregulation.
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