In order to secure a purchase, a buyer needs to (1) be enticed to purchase, and (2) actually have the money to buy it. Having worked in marketing, I know that (1) is easy. Tiger Breweries could replace their mascot with a dead chihuahua and I’d still get smashed on weekends. Condition (2) is a bit tricky. Businesses need you to buy things…often things you can’t afford.
So they’ll tell you to buy that TV now, and pay for it later. Except while this is going on, they don’t have your money. The solution?
Credit cards make money for the banks, mainly through interest rates. The later you pay, the more you’ll owe. Cross a certain point, and you’ll be paying for the rest of your life. Even if you do pay it all back, you would have paid more than the price of what you bought, which is still a good deal for them.
It’s Not a Charity
Look, I’m not going to declare that all banks are run by pale, fanged figures who are hilariously repulsed by garlic. Some of them, heck even most of them, are sincerely trying to provide a service. Everyone needs a hand sometimes.
But at their very core, credit cards are about business. And credit card companies want you to default, because otherwise, they’re not making money.
The Current Situation:
(1) According to MAS, the number of main cardholders increased by 13.35% in December 2010 from December 2009
(2) The total billings for 2010 were at S$30.94 billion, an increase of 18.86% from 2009.
How They Make Their Money From This:
The total rollover balance, for every credit card holder in Singapore, was $4 billion in 2010.
A rollover balance happens when a card holder doesn’t pay his monthly bills. When that happens, the debt carries on to the next month. The longer this goes for, the more money the card holder owes. It’s called compound interest.
Since card holders end up paying more than they initially borrowed, the banks make money.
Taking a typical interest rate of 25%, the banks earned $1 billion from credit card holders in 2010. Not a bad deal, considering all they had to do was basic math.
To encourage rollover balance, the banks don’t force anyone to pay their debt in full. In fact, they’d rather you not. The minimum you need to repay is usually 2 percent of your outstanding bill. That way, the remaining 98 percent of your debt can accumulate.
Young Adults Throw Money at Banks
The Credit Bureau of Singapore, undoubtedly one of the most thrilling places to visit, shows that young adults (21-29 years of age) represent 39% of frequent revolvers.
The term “frequent revolver” refers to card holders who accumulate huge rollover debts, supposedly because they have a “revolving line of credit”. Personally, I suspect it’s because they’re frequently the sort who end up using revolvers – To perhaps knock over a 7-11 because they can no longer afford a Slurpee.
Seriously though, credit card companies like this demographic, despite the high risk status. Someone aged 21-29 is at the start of their career, and has a lifetime to pay back the debt. In Singapore, it’s also not unusual for someone in this demographic to still live with their parents. The stronger family bonds mean that parents may sometimes bail them out, instead of letting them declare bankruptcy.
This age group is also at a point where they’re making major financial “firsts” (first car, first house, first time holidaying alone, etc.)
Deadbeats and Washouts
If you pay your debts on time, the credit companies refer to you as a deadbeat or a washout. But I’m too mature to get into any name calling here, even if I’m being insulted by some random banker with a face like the northbound end of a southbound camel.
The reason they get hostile is because you’re not paying any interest. When you keep paying off your debts on time, there’s no way for the amount you owe to accumulate. The bank still makes a nominal sum off you, from administration fees. But the amount is so little that it’s not worth their time.
If you keep on being a deadbeat or a washout (their names, not mine!) you’ll find your credit limit rising. This is the bank’s way of encouraging you to please spend more, so that you can’t pay it all back on time.
How to Stop Them From Invading Your Wallet
- Don’t use your card unless you absolutely have to. Medical emergencies, housing loans, car loans, etc. are good reasons. Buying a console so you can play Naked Fury XXXV isn’t.
- Pay back the full amount, whenever possible. Don’t become a frequent revolver.
- Avoid temptation by limiting your access. I randomly scatter my credit cards between book pages. Whenever I feel tempted to buy something stupid, I either don’t have the card on me, or I lose the desire while going home to search.
- Do the math. Based on your paycheck, calculate the maximum you can spend with credit each month, while still paying back in full. On the rare occasions when I use my card, I keep the receipts and tally them. If my bill doesn’t match, I know there’s a term or condition I’ve overlooked.
Growing up, I was always told that I was a deadbeat. And I’m proving it every day.
Have you had any personal experiences with banks encouraging you to spend more? Share them in the comments below.
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