The recent data release from the Monetary Authority of Singapore suggests that consumers in the country might be going overboard with their credit card usage. Here, we discuss the rise in bad credit card debt, its potential causes and consequences.
Credit cards are incredibly popular in Singapore, especially due to the high amounts of rewards that issuers provide to their members. In fact, the number of credit cards in circulation has grown by 130% since 2004 to over 9 million. But, recent data release from the Monetary Authority of Singapore suggests that this rapid growth in credit card usage may be going overboard. As people rely on debt to finance their consumption, banks are starting to take some heat in form of bad credit card debt.
Bad Credit Card Debt Nearing 10-Year Peak
According to the latest data release from the Monetary Authority of Singapore, bad credit card debt that was "written-off" jumped 16% to S$27.9 million in March compared to S$24.1 million in February, after gradually declining in 2017. In fact, the current level of written off card debt on a per card basis was only 4% lower than its peak level in the last decade.
Bad Credit Card Debt Write-Off Per Card in Singapore
What this means is that less consumers were suddenly less willing or able to repay their credit card balances in 2018. Typically, banks take a loss and "write-off" delinquent loans that are more than 30 days overdue and cannot be recovered. To help prevent such phenomenon, the government introduced a financial instrument called debt consolidation plans in 2017. This instrument may have contributed to the ease in growth of written off card debt in 2017 by helping consumers consolidate their various personal loans and credit card debt into one that could be more easily repaid at a lower interest rate. The fact that bad card debt rising so sharply again after DCP has had its initial effect suggests certainly has some negative connotations for the economy.
Why Could This Be Happening?
While there are many possible reasons why consumers are suddenly defaulting on their credit card debt, we can try to build some theories and understand the phenomenon through digging into data. First, it seems that consumers' reliance on credit card has increased meaningfully in the last year or two. For instance, total billings per card in Singapore has risen rapidly starting in 2016, now reaching an all-time high level above S$500 per card. This suggests that people may be using cards to spend more than they could previously afford.
Total Credit Card Billings Per Card in Singapore
Secondly, card debtors might be starting to receive the financial pressure of rising interest rates. As the US Fed began its rate hike in 2015, 3-month SIBOR rose to its highest level since 2010. This could be making it more difficult for borrowers to repay their card debt as their interest obligations increased. As an evidence, the increase in rates also has been leading to higher credit card delinquencies in the US as low-income borrowers have been struggling to keep up with the increase in the cost of their debt.