Borrowers, beware the snowball effect of 'debt creep'

UOB's Jacquelyn Tan cautions that unsecured debt can quickly snowball if one does not spend responsibly and sensibly when using a credit card or a line of credit. OCBC Bank's Kenneth Tan says a borrower with unsecured debts of between six and 12 time
UOB's Jacquelyn Tan cautions that unsecured debt can quickly snowball if one does not spend responsibly and sensibly when using a credit card or a line of credit.
UOB's Jacquelyn Tan cautions that unsecured debt can quickly snowball if one does not spend responsibly and sensibly when using a credit card or a line of credit. OCBC Bank's Kenneth Tan says a borrower with unsecured debts of between six and 12 time
OCBC Bank's Kenneth Tan says a borrower with unsecured debts of between six and 12 times his monthly pay is likely to be a Singaporean between 35 and 45, earning an average monthly income of more than $5,000 and living in an HDB flat.

With the new Credit Limit Management Measure coming into effect on Jan 1, financial experts caution consumers against overspending and falling deeper into debt. The new measure will help those in danger of being overwhelmed by unsecured debt like credit card borrowing.

Mr Kuo How Nam, chairman of Credit Counselling Singapore, says that while those with smaller debts are not in trouble for now, there is reason for caution. Experience has shown that for some, such debts start to pile up as the borrower remains unconcerned and continues to spend.

"This is a very common experience of what is known as debt creep, where a small debt starts to grow incrementally until the point is reached where the individual cannot clear his debts and becomes a hardcore revolving borrower," he says.

Mr Kuo adds that it is "surprising" that since January, an average of 4,000 borrowers every month have hit unsecured debt levels 12 times their monthly income or more. The Monetary Authority of Singapore (MAS) considers exceeding this level as "highly indebted".

"These are new debtors who are taking on debt, even as older debtors are paying down their outstandings under the existing MAS restrictions. I am not sure whether this is something new happening, that is, we now have millennials who are growing careless with their finances or people who are more confident with the booming stock markets and recovering property market," adds Mr Kuo.

Ms Jacquelyn Tan, United Overseas Bank's head of personal financial services for Singapore, cautions that unsecured debt can quickly snowball if one does not spend responsibly and sensibly when using a credit card or a line of credit.

"Borrowers with excessive unsecured debts typically own many different credit cards from different banks and have a habit of spending on credit. This means that they tend to make purchases that are beyond how much money they currently hold and are able to afford," she says.

As such, they often pay only the minimum sum on their credit card bills and roll over their credit card balances from month to month.

They may also choose to forfeit payments if they are unable to pay. In doing so, they are charged interest on these balances as well as any subsequent purchases they make. As a result, their outstanding debt snowballs.

Mr Kenneth Tan, vice-president of group lifestyle and payment products at OCBC Bank, says a borrower with unsecured debts of between six and 12 times his monthly pay is likely to be a Singaporean between 35 and 45 years old, earning an average monthly income of more than $5,000, and living in an HDB flat, with a diploma or university degree. About 60 per cent of such borrowers tend to be males, and their outstanding balances are between $30,000 and $60,000.

With his years of experience counselling debtors, Mr Kuo calls for more understanding of people in debt. He says that not every borrower is a careless spender.

"Many are living with tight budgets, and it does not take much to push somebody into penury if incomes are already stretched and they have little savings to fall back on," he says.

Another common cause for heavy debt is job-related. This is a situation where a change in job status, salary, bonus or even work allowances could have an effect on the individual's or his family's ability to maintain their lifestyle.

For instance, an individual or his spouse may get retrenched, their bonus and overtime reduced, or they may have to take up a new job at a lower salary.

"Many retrenched people are also overconfident that a new job is just around the corner and continue to spend as before. If there is a long period of unemployment or they have to get a job that pays substantially lower, the individual may already have chalked up large credit card debts," notes Mr Kuo.

Another large group of borrowers are those with heavy family responsibilities. They may have sick parents or children with special needs, which makes it very difficult for them to manage their finances.

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A version of this article appeared in the print edition of The Sunday Times on December 24, 2017, with the headline 'Borrowers, beware the snowball effect of 'debt creep''. Print Edition | Subscribe