Revenge spending and a looming credit crunch

Have you been breaking your credit card with revenge spending? If you are, you’re certainly not alone.

At this time of uncertainty, one would think Filipinos are tightening their belts and spending only on essentials, but that this is not always the case for some.

While credit card usage in the country slumped — reflecting a 27 percent decline in billings in the first half of 2020 compared to 2019 — many are still spending, and some of those who do are spending on non-essential goods.

Revenge spending

Some Filipinos, cooped up at home with nothing to do, lured by Black Friday sales and all sorts of double number sales, e.g., 11.11, are doing revenge spending. The good news is that this is good for the economy, and our stressed out economic managers and tycoons surely welcome this. It’s good for business after all.

But here’s the caveat.

Some of the blind spenders are unable to pay, causing trouble for some credit card companies. If this continues, the Philippines may see a credit crunch.

I learned all these from a recent chat with Credit Card Association of the Philippines (CCAP) executive director Alex Ilagan.

Like many other sectors, the credit card industry has been severely affected by the global health crisis, he said.

As economic challenges continue to pile up, high unemployment rates have gone up. The result is that some consumers are hesitant to apply for new credit cards and existing credit card holders are unable to settle their credit card bills.

Transaction volumes are down

One problem facing the industry is that transaction volumes have gone down. This is because a lot of people lost their jobs as businesses suffered with a lot of closures, Ilagan shared with me.

Aside from lower transaction volumes, credit card companies are also dealing with increased delinquencies and they have had to provide for potential losses as a result of delinquencies.

Ilagan said delinquencies may continue to rise as card holders experience  difficulty in paying off their bills. The debts will incur interest and translate to even bigger losses for both the card user and the card company.

To help ease the burden on borrowers, the government called for a grace period for payments falling due. But the grace period — 30 to 60-day grace period under the Bayanihan Law — translates to additional costs for credit card companies.

“We have paid the merchants, but we cannot collect from the credit card holders. We’re not earning interest, but we have to fund the receivables,” Ilagan said.

The Bangko Sentral ng Pilipinas (BSP) has also issued last month a circular capping finance charges on unpaid outstanding credit card balance at 24 percent annually. While this is good for consumers, it also means more restrictions for credit card companies.

Past due loans

Before COVID-19 struck, the credit card industry’s past dues accounted for four percent of the total credit card receivables.

However, as of the third quarter of the year, past dues have now more than doubled to roughly 12 percent.

“We expect that to continue to grow in the coming months. The interest will be piling,” Ilagan said.

How big is the industry?

There are about six to seven million credit card users in the Philippines utilizing about 10 million cards, including supplementary cards. The average credit card limit is P30,000 to P40,000, according to CCAP.

To cope with the challenges, credit card companies are implementing better payment schemes and restructuring provisions.

Some are providing longer payment schemes, all to help card holders cope with financial stress, Ilagan said.

Think before you swipe

But Ilagan said it is also important for credit card users to practice restraint in using their cards so they won’t find themselves buried in a pile of debt.

“They have to be more disciplined in their use and spend only for essentials,” Ilagan said.

“Cases of online fraud have also gone up. Online fraud has started to pick up so we’re also trying to educate card holders to be more careful in using their cards online.”

Credit card crunch

If all these problems continue — an increase in delinquent volumes, online fraud cases, bad debts, irresponsible spending — credit card companies will suffer, Ilagan said.

Credit card companies will retrench as they start finding ways to cut cost.  Some may have to cut reward points and benefits, and some of them may start retrenching employees.

Banks will also have to be more selective in issuing credit cards and some will reduce credit limits.

“This is the reality of the situation,” Ilagan said.

The picture isn’t too bleak and the solution is a combination of efforts on the part of credit card users and card companies.

I think the problem lies also in credit card companies’ indiscriminate issuance of cards without really knowing the customer’s credit history because they simply want to make more money.

For users, it is best to think before you swipe. Forget about revenge spending.  As with any revenge, the pleasure is only temporary and in the long run, you might only be digging your own grave. In this case you will only be buried in more credit card debt.

Iris Gonzales’ email address is [email protected]. Follow her on Twitter @eyesgonzales. Column archives at eyesgonzales.com