Confront debt instead of borrowing more, say experts

More breathing space for debtors but they need to 'make lifestyle changes'

A few overstretched borrowers might turn to licensed moneylenders or even loan sharks in response to tighter limits on credit card and other unsecured debt, financial advisers warn.

However, they urge people in dire straits to confront their debt head-on, instead of digging themselves in deeper by borrowing even more.

The Monetary Authority of Singapore (MAS) said yesterday that it will phase in a tighter limit on credit card debt and other unsecured credit facilities - relaxing plans to implement all the rules from June 1. The aim is to give affected borrowers more time to reduce their level of debt.

Under the new timeframe, the rules will come in over four years, with only the most heavily indebted people affected from June 1.

The gradual phase-in will cushion affected borrowers from being hit too hard, and "will allow people to continue to borrow without being too badly impacted", said Mr Christopher Tan, chief executive of financial advisory firm Providend.

However, Mr Tan noted that most unsecured loans - such as credit card borrowing - are for spending on "lifestyle items" and not necessities.

"In the first place, (indebted borrowers) should not be leading that lifestyle," he said, adding that Singapore is "increasingly becoming a debt-driven society".

Mr David Poh, president of the Moneylender's Association of Singapore, said the industry might see an uptick in demand as a result of the new rules, as borrowers who have maxed out their credit from financial institutions often turn to licensed moneylenders "as a last resort".

However, licensed moneylenders have their own set of criteria when assessing the credit worthiness of potential borrowers, he said.

"If a borrower is already in too much debt, they might not be able to repay the loan," added Mr Poh.

Credit Counselling Singapore president Kuo How Nam said that while there might be borrowers who are driven to obtain loans from licensed moneylenders and even loan sharks as a result of the tighter credit rules, "it is a question of choice".

"If they carry on with their profligate ways and don't want to face up to reality, they will end up digging a bigger hole for themselves. The bigger the hole, the harder it is to get out of it," said Mr Kuo.

Even without the limits imposed by the MAS, "(these borrowers) are likely to still go down the same road", he added.

"The only real solution is to realise that it's self-destructive, and make lifestyle changes."

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, said the MAS move is timely, given the ease of making payments with credit cards, and the fact that some people hold credit cards from multiple banks.

Maxing out their credit with every bank would "overload them with debt", said Mr Chia, who gave the example of a client with $500,000 worth of credit card debt, mainly as a result of interest compounding.

"The limits announced by MAS will act as a check and balance and restrain people from borrowing beyond their means."

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