Unsecured Credit Health of Singapore Consumers
What is Unsecured Credit?
In simple terms, unsecured credit is basically money that you can borrow without requiring you to pledge any collaterals in order to obtain this loan application.
Credit providers or lenders like banks and financial institutions (FIs) will evaluate a borrower’s lending capacity limit before deciding how much money or credit limit the company is willing to extend out to the borrower.
Unsecured credit tends to have a higher borrowing risk as there might be a probability of the borrower defaulting on his future payments or incapable of paying his outstanding balances on time. Therefore, lenders will usually also take into consideration on other factors such as the borrower’s risk profile, annual income, or search on any past or ongoing bankruptcy or litigation cases before deciding on the maximum credit limit to disburse to the borrower.
An individual is only able to use up to the approved credit limit that he or she is given, and the credit limit will decrease as new purchases are transacted into his credit facility.
Unsecured Credit Health of Consumer in Q2 of 2023
Based on the Consumer Credit Index (CCI) Issue 27 published by Credit Bureau (Singapore) (CBS), the highest new credit facilities applications for Q2 2023 attributes to Credit Card, followed by Overdraft, Real Estate Loan, Motor Vehicle Loan and finally Personal Loan. However, the Bureau also noticed a large increase of Overdraft and Personal Loan applications between Q1 2023 and Q2 2023 with 96.75% and 65% increase in applications respectively.
When comparing between the two quarters of 2023, age group 21-29 has the biggest change in Unsecured Credit Card consumption with +2.53% increase followed by a +10.64% increase for Unsecured Personal Loan. The payment performance has suggested that age group >54 has a higher default rate with 121.77% increase in Unsecured Credit Card when comparing between Q2 2023 over Q1 2023.
For Unsecured Personal Loan, age group 30-34 has the biggest change with 9.69% increase in delinquency rate (from 3.7% to 4.06%) and 53.45% increase in default rate (from 0.21% to 0.33%) for age group 50-54. Unsecured Overdraft also saw a significant rise in default rate with 234.98% (from 0.07% to 0.23%) increase for age group above 54.
In summary, consumers are spending more on their credit cards. However, the situation is under control so far as overall default rates remain low (below 0.2%) and there are measures in place to prevent consumers from falling deep into debt.
Click here to read the full report: https://www.creditbureau.com.sg/pdf/CONSUMER-CREDIT-INDEX_Q2_2023.pdf
Measures In Place to Prevent Consumers From Getting Deeper Into Debt
The Monetary Authority of Singapore (MAS) has placed regulations on Balance-to-Income (BTI) ratio on unsecured credit facilities limit. This rule is implemented to help borrowers avoid accumulating excessive debt by enhancing the lending practices of Financial Institutions (FIs).
What is BTI? BTI is calculated by dividing the borrower’s outstanding interest-bearing unsecured debt by his monthly income. For example, if a borrower has an outstanding interest-bearing unsecured debt of $12,000 and earns a monthly gross income of $3,000, his BTI is 4 times.
A low BTI ratio demonstrates a good balance between debt and income, this would mean that the borrower is likely to effectively manage his monthly obligations.
Conversely, a high BTI ratio can indicate that an individual has too much debt for the amount of income earned each month, this would suggest that he might be struggling to pay off the debt payments relative to their income.
Since 1 June 2019, the BTI has been set at 12 times. FIs may not grant further unsecured credit to an individual whose BTI ratio exceeds the industry-wide borrowing limit for three consecutive months.
If the total interest-bearing outstanding balances on all credit cards and unsecured credit facilities with all FI in Singapore exceed the industry-wide borrowing limit for 3 consecutive months, a borrower’s account will be suspended, and he will not be able to:
> Charge new amounts to your existing credit card(s) and/or use other unsecured credit facilities with all financial institutions;
> Obtain credit limit increases on your existing credit card(s) and/or other unsecured credit facilities with all financial institutions;
> Apply new credit cards or other unsecured credit facilities from all financial institutions.
This means that the FI cannot allow further drawdown of existing credit limits, approve credit limit increases, or grant new credit facilities to such a borrower.
Use Credit Prudently
Borrowing beyond your means can leave you struggling financially as you go further into debt and affect your daily lives. Debts can leave you with long-term financial scars that will take a period of time to recover and get back on your feet. Be prudent in your spending and exercise good repayment habits to leave behind a good record of credit history.
Lastly, be sure to follow Credit Bureau Singapore and Moneylenders Credit Bureau on Facebook and LinkedIn for more useful content and tips on how to maintain a good credit reputation. To learn more about what other services and products we provide, visit CBS website at https://www.creditbureau.com.sg/ and MLCB website at https://www.mlcb.com.sg/
If you are facing increasing difficulties servicing payments to your credit cards or other unsecured credit facilities, consider attending our weekly Debt Management talks (conducted both over Zoom and in-person at our office), where you will learn more about what to do, when and how to communicate with creditors, what are the common collection actions creditors can take, what are the various debt settlement options are and what is the CCS Debt Management Programme. Click here for schedule.
After attending the talk, you can submit a request for one-to-one credit counselling. Details on the counselling session and instructions on how to arrange for an appointment will be explained during the talk.
Published 15 September 2023.