Credit Card - Legal Loan Shark

Credit cards are becoming more about credit and less about cards. Instead of using plastic cards, consumers are using their smartphones. Thousands of card holders have been declared bankrupt because of the increasing number of credit cards made available.

The credit card market has changed    over the past two decades. Credit cards have become   important as a source of short-term borrowing. The buy-now-pay-later mechanism of credit cards allows users to defer payments.

When card users  hold outstanding balance, the outstanding balance becomes credit card debt, which will be carried forward to the next month’s billing cycle. Compared with other consumer debts, credit card debt is flexible, non-secured and uncommitted. This means there is no collateral to guarantee the repayment of credit card debt.

Card holders can decide whether to revolve their credit cards, how much to revolve within the assigned credit limit and when to pay it off. Because of the non-secured and uncommitted features of credit cards, card holders are more likely to default on credit card debt than other secured debts, such as home loans, car loans and instalment loans.

Since no collateral can be repossessed by card issuers, there is barely any recovery from credit card debts once households have defaulted or declared bankrupt. Consequently, bankers usually charge high interest rates and service fees on credit card debt.

It is more expensive to carry unsecured debt than secured debt. Many people have been declared bankrupt due to heavy credit card spending and for failing to settle their loans.

Credit cards were introduced to Malaysians in the mid-1970s. In Malaysia, they are  grouped into conventional and Islamic cards. About 20,000 cards were issued to upscale income earners and professionals during that time.

Among the consequences of compulsive spending is excessive debt, which could result in non-performing loans and bankruptcy proceedings. As such, financial planning plays a crucial role in debt management.

Credit card debt has become a focus of academic and public policy in recent years.

For example, some researchers tried to include credit card interest rate, credit limit or other credit card-related features into the life-cycle model to understand borrowing behaviours, sticky interest rates in the credit card market and determinants of credit card borrowing decisions theoretically. 

Some focused on specific card users, such as students, women, the elderly, low-income population, baby boomers or pre-baby boomers. Others focused on revolvers’ borrowing decisions.

Usually, borrowers with a monthly budget displayed better money attitude and have a lower chance of falling into the credit card debt trap. If you are concerned about your credit cards, spend wisely.