More cooling off measures needed
SINCE young, my parents have advised me to save for the rainy days and old age. To lead by example, they walked the talk by adopting a prudent lifestyle throughout their entire lives.
Their advice has been ingrained in me so much so that I have learned to spend wisely and plan for my retirement. I have been sharing this concept with the younger generation in the hope that it would benefit them in terms of financial planning.
However, this practice appears to differ from what we hear from the public nowadays. In the past few years, I have received phone calls offering me credit card and personal loan facilities, and the number of calls has escalated in the recent months.
When I asked around, I found out that most of my family members and friends have also been offered such facilities via phone calls almost every month. Most of the time, there was no pre-qualification questions when the sales personnel approached them through the phone.
The sales personnel will offer incentives such as low interest rates to persuade the potential customer to take up the offer. However, if there is a delay in repayment, the rate would jump according to the interest incurred on the credit card outstanding balance, which can range from 15% to 18% per annum.
The easy access to credit card and personal loan facilities generally tend to encourage people, especially our youth, to spend excessively without looking at their current financial situation. They tend to spend more when there is an “attractive” interest rate and various promotions offered.
It is therefore common to see young adults going on extravagant holidays or purchasing luxury items which can rack up their credit card balance. As a result, a great part of their salary is used to make the monthly repayments.
Last month, it was reported that many young Malaysians were unable to afford even PPR (People’s Housing Programme) flats because they had been blacklisted by CTOS (a credit reporting agency) for defaulting on their credit card repayments.
News articles also quoted that one of the causes of bankruptcy among the younger generation was due to the use of credit cards in excess of financial capability.
It is sad to see the younger generation taking up more debt due to their high-maintenance lifestyle. Our neighbouring country, Thailand, has tightened controls on credit cards and personal loans last September, at a time when there was high concern of overspending by its citizens and of rising bad loans.
It was announced that only individuals earning at least 50,000 baht (RM6,311) a month could get a maximum credit card spending limit of five times their monthly salary. This was also a move to contain their high household debt levels and cut domestic consumption.
Having seen our neighbouring country’s control measures, let us take a look at our own credit card regulations. At present, a principal cardholder earning RM36,000 per annum or less can hold credit cards from a maximum of issuers, and at a maximum credit limit of two times their monthly income per credit card issuer.
Those who earn more than RM36,000 per year can, however, own multiple cards with any number of banks in Malaysia. These cardholders are only bound by the maximum credit limit imposed which is at the discretion of the banks and Bank Negara. The rules are loose compared with the new regulations in Thailand.
In the first quarter of 2017, the country’s household debt was at 86.7% of gross domestic product (GDP), which ranked as one of the highest in Asia, and definitely higher than Thailand which was at 78.6% of GDP.
We have been hearing of financial advice to limit our housing debt and other commitments, to achieve an ideal level of debt-to-income ratio.
However, shouldn’t we also impose drastic cooling off measures on credit card debts in view of the above situation? Credit card debts are non-asset-backed. Hence, it can be detrimental to financial health if people do not live within their means. It is important for the authorities and banks to encourage prudent lending and spending.
Back to the practice I shared earlier, it is a good habit to save up for old age. There are many ways to do so, such as putting money into property investments, saving money in banks, the Employees Provident Fund, unit trust and long term shares.
Peter Lynch, a successful mutual fund manager who ran Fidelity’s Magellan fund from 1977-1990 with an annual average return of 29%, suggested that people buy a house first before investing in the stock market, as it was unlikely for them to lose money on their own home.
His suggestion is particularly relevant to the younger generation who have yet to purchase their first home. It is important to start planning for old age through savings and investment in assets, and not sacrificing the quality of retirement life for a lavish lifestyle in the short term.