SINGAPORE - Media OutReach - 7 August 2018 - Singaporeans are big credit card fans -- and an improvingeconomy means consumers are swiping plastic more frequently than ever. Butbeneath this exuberance lurks the risk of escalating debt, which can have direconsequences for individuals and families. Credit card debt here has beeninching up, but how big is the problem and how much of a risk does it pose?What should borrowers be taking note of when it comes to managing their creditcard debt?

Credit card debt on the rise

Household debt levels in Singapore are largely under control,thanks in part to borrowing curbs imposed in recent years^[1].Still, a small but growing group of borrowers continue to struggle withmounting credit card debt.

Creditcard debt made up about 4.3 per cent of all consumer loans in 2016 - roughly onpar with 2015's 4.2 per cent, accordingto data from the Department of Statistics^[2]. Thiscapture ending credit card balances that remain unpaid at the end of the month.

The Monetary Authority of Singapore (MAS) introduced new rules to curb unsecured borrowing in 2013 , as part of efforts to put a lid on rising householddebt. Among other safeguards, an industry-wide borrowing limit was introducedin June 2015. Under this rule, financial institutions are not allowed to extendfurther unsecured credit -- which includes credit cards - to borrowers whosedebts exceed a prevailing limit. This limit is being phased in over four years-- starting with 24 times a borrower's monthly income from June 2015, to 18times from June 2017 and 12 times from June 2019.

These regulations helped lower total debt among Singaporehouseholds. Growth in outstanding credit card balances moderated from a peak of14 per cent year-on-year in the second quarter of 2012, to an average of 2.6per cent in the first nine months of 2017, datafrom Credit Bureau Singapore (CBS) showed^[3].

But households are still holding on to significant credit card debt. Banks wrote off a total of S$128.3 million in bad creditcard debt from January to May this year, according to MAS data. On a per cardbasis, bad credit card debts written off reached S$3.34 per card in May 2018 --a level last seen in 2005. This means borrowers were persistently unable torepay these loans, forcing banks to write them off.

This comes as the number of credit cards in circulation here hasrisen rapidly over the past decade according to MAS data^[4]- from about 6 million in May 2008 to a whopping 9 million as at May 2018, a 50per cent surge.

The MAS noted in its November 2017Financial Stability Review^[5] that thereare still "a number of borrowers who are increasing their level of indebtednessabove 12 times their monthly income".

Why is credit card debt climbing?What are the risks?

Consumers accumulate creditcard debt for a variety of reasons, including spending above their means, boutsof unemployment and paying for essentials. Creditcards are an increasingly popular mode of payment, which might be part of thereason why borrowing is on the rise. Financial institutions offer a wide arrayof perks to encourage consumers to spend more on their cards -- from cashbackand airline frequent flyer miles to free gifts and sign-up offers. In addition,it is now easier than ever to make payments with a credit card -- the rise of e-wallet apps like Apple Pay,Android Pay and Samsung Pay, for example, allow users to tap and pay for goodsand services at contactless payment terminals.

The numbers show that people in Singapore are increasinglyreliant on their credit cards. Monthly billings per card hovered between S$300to S$400 from the mid-1990s to early-2010s, but have started rising above $S400in recent years^[6]. In May2018, monthly billings per card amounted to about S$555, after reaching S$514in April and S$537 in March.

Evenas consumers spend more on their credit cards, interest rates are also on therise -- making it tougher for some to meet their repayment obligations. Afterthe global financial crisis, major central banks around the world usedultra-low - even negative - interest rates as a tool to revive economic growth.Lower interest rates make it cheaper and more appealing for households andbusinesses to borrow. Since then, however, the global economy hasrecovered and growth has picked up. As a result, policymakers have graduallystarted raising rates. The United States Federal Reserve has been leading thepack of developed market central banks in lifting interest rates from theultra-low levels implemented in the wake of the global financial crisis.

Interestrates in Singapore are highly correlated with global rates - the Fed's latestrate hike announcement in June 2018 sent the three-month sibor, or Singapore inter-bank offered rate,used to price home loans -- to its highest level since 2008. Credit cardinterest rates are also rising in tandem with these broader increases, makingit more expensive to borrow.

Reducing the cost of credit cardborrowing

1. Pay credit card bills on time and in full

Credit card users typically fall into two main categories -- "transactors" and "revolvers".Transactors pay their credit card balances in full every month and avoid payinginterest. Revolvers carry credit card debt from one month to the next, payinginterest on their average daily balance.

Creditcard borrowing is extremely high-stakes - interest rates are astronomical atover 26 per cent a year. Rollover balances also incur late-payment charges thatare tagged on to the outstanding principal, further magnifying the amount owed.As a result, credit card debt can snowball very quickly - which means being arevolver can be very expensive. Clearly, the mosteffective way to avoid falling into credit card debt is to pay off balances promptlyand in full. 

2. De-clutter your wallet

There is no magic number for the number of credit cards aperson should have -- it depends on spending behaviour, financial goals andpersonal money management.

A consumer who pays off balances in full and on time everymonth can consider having multiple cards to take full advantage of benefitssuch as cashback, frequent flyer miles and discounts. However,holding more cards also means greaterpotential for racking up debt.

Besides limiting your borrowing, having fewer credit cardsalso means fewer bills to keep track of each month -- which can help you stay ontop of your credit card payments and avoid incurring late fees or interest.

3. Consider switching to a personal loan

Instead of dealing with sky-high interest rates, consumers can consider usingpersonal loans to pay off credit card debt. Taking on more debt might soundcounterintuitive, but personal loans can actually help borrowers save money.

Personal loans are "unsecured" loans, which means that unlike securedloans, they are not backed by collateral -- like a house or a car - that lenderscan repossess if borrowers default. This means personal loans have higherinterest rates than secured loans, but they often offer lower interest ratesthan credit cards.

Personal loans can be used to consolidate your credit card debt intoone manageable account, as long as you stay within your borrowing limit. Thiswill help cut back on the number of bills to pay and keep track of every month.Instead, a personal loan allows borrowers to pay a fixed amount monthly.

There are three main types of personal loans available in Singapore. Personal instalment loans -- themost common type - provide a lump sum of cash upfront, with monthly repayments.The second type is a credit line, which allows borrowers to draw moneyas needed and pay interest only on the amount borrowed. Finally, balancetransfers allow borrowers to consolidate outstanding debt into one account,with fixed monthly repayment schedule.

One of the newest and mostattractive options on the market is the Standard CharteredCashOne Personal Loan, which offers guaranteedflat interest rates as low as 3.88 per cent per annum (EIR: 7.63 per centannum) regardless loan amount and tenure. This rate is exclusively available onpersonal finance comparison website SingSaver,for a limited period. Borrowers can borrow up to four times their monthlysalary, capped at S$250,000.

Singaporeans have a total outstanding debt of about S$70.4billion on credit cards and personal loans, according to 2017 data from theDepartment of Statistics Singapore. But if each borrower took time to considertheir personal loan options, Singaporeans could collectively save more thanS$500 million on interest payments every year (assuming S$23.5 billion inpersonal loan debt and an interest rate of 3.88 per cent per annum).

While personal loans can be less costly than credit card debt,however, they still come at a relatively high price. For some borrowers,personal loans might not be a viable long-term solution -- especially if theirdebt is the result of overspending or lack of income. Before taking out anotherloan, these borrowers should consider identifying and tackling the root causeof their debt through financial re-evaluation or lifestyle changes. Ultimately,borrowers need to do their research and make sure personal loans arefinancially viable for them.