Cracking down on credit cards

A credit card can be a very deceiving thing. At first glance, it’s very appealing because it’s convenient, you don’t have to carry cash with you all the time, and you are able to purchase items you might not have been able to afford at the time and pay for them later. Indeed, in theory, there are a lot of upsides to having a credit card. But, there is also a very insidious downside as well. While the power of plastic can help you in your daily life, it can also trap you as well. Before you know it, you’ve accumulated a debt you can’t pay and are constantly struggling to catch up.

I’ve seen it happen, usually to those who get their cards for the first time. They are so easily drawn into the financial freedom of being to afford things they may not have been able to buy before and rack up more and more purchases without considering the total accumulated amount. Then when the bill arrives, they don’t settle the amount in full and just pay the minimum. Before they know it, the cycle continues and soon they are in too deep.

It’s a very slippery slope, one that even the most responsible of people can fall down on. In fact, I remember that credit card debt was cited as one of the contributing factors to the economic downturn in the United States several years ago. On average, Americans owed over $8,000 in credit card debt, which continually just got bigger and bigger, the more and more interest it gained if the credit card owner could not afford to settle the debt in full. What’s more, a lot of young Americans still don’t realize the insidious nature of their plastic and continue to rack up debt, thinking they’ll eventually pay it off in some distant future.

In the Philippines, credit card consumer debt was not initially as bad because years ago it was very difficult for someone to get a credit card. The young people especially would have a very hard time securing their first card because they did not have large sums in the bank yet and very possibly were just starting their first job, or didn’t have prior proof of billing. I remember when my daughter was applying for her first credit card after working for one year. The first bank said they couldn’t grant her one unless she already had one. And the second bank she approached asked her for so many requirements, which she submitted in full, only to have them disapprove her application as well.

Times certainly have changed though in the past decade. Today, it’s not nearly as hard for people to get their hands on a credit card. In fact, they are so readily available that people are already turning them down. I often get overwhelmed at seeing how easily available credit cards are these days. Shopping malls, groceries, and any place people go to usually have a credit flyer booth with bank employees approaching those that pass by and offering them a credit card on the spot — sometimes with a free gift too.

And of course, with credit cards so readily available, it’s no wonder that credit consumer debt has increased in the country and with it high delinquency rate for payment of credit card bills. Collectors have their hands full chasing down customers for payments on a monthly basis, but still more and more plastic is being churned out and offered to new customers every day.

And it’s not just credit cards too; banks are also peddling personal loans and credit-to-cash deals to their clients regularly. In fact, I think I must be getting at least 2 to 3 calls per week from different prestigious banks offering low interest rate loans, new credit cards, or other money lending promotions. I initially thought it might be because of my triple-A credit standing (I got my first credit cards as a pioneer at Citibank back in the day and have maintained excellent credit standing since), but then I realized that they reach out to practically everyone that has plastic with these offers. Even if they are turned down, they continue to call and send SMS messages with their offerings.

I definitely feel that the ease with which one can get a loan or credit card from the bank is scary, especially with Filipinos, since a great deal of the population is not finance savvy. Many of the youth can easily get drawn in with the enticing offers only to find themselves mired in debt. This is why I think it is definitely a good move by the Bangko Sentral ng Pilipinas (BSP) to issue new prohibitive credit card restrictions to help consumers from accumulating excessive debt.

These new amendments, carried under Circular No. 845 and signed by Governor Amando M. Tetangco Jr. this August, expands the definition of activities “tantamount to the act of issuing pre-approved credit cards.” Existing rules already prohibit banks from giving out pre-approved credit cards to lenders and now with the new rules this prohibition also includes calling clients and offering credit card applications over the phone, mailing clients credit cards that are considered “live” in the mail, and sending clients new cards due to their good credit standing.

I think these new restrictions are a good move, both in terms of regulating the ways in which banks reach their customers to offer them promotions as well as helping consumers in keeping their debts manageable without the temptation of a brand new piece of plastic. In this aspect, I commend Governor Tetangco for taking a proactive step in stopping the rise of excessive consumer debt.

Personally I think that everyone who has a credit card or wants one needs to fully examine their needs and carefully choose the card they want to maintain. It’s very enticing to know that you have several credit card options, but the truth is the more you have the more you are likely to use. If you maintain one controlled limit credit card for transactions that require you to use credit, such as airline tickets, hotel reservations, and the like, you will be better able to regulate your spending and keep track of what you buy.

For those, however, who find themselves in credit card debt, the very best option is to pay it off as soon as possible as interest will continue to bleed you dry every month. The best way to do this is to stop using it at all and then set aside more than the minimum payments monthly until you’ve covered the whole amount. After all, you don’t just want to continually keep paying the bank interest indefinitely. That’s money you could have set aside for your savings.