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SAGE Talk: Borrower Behaviour – Confidence and Fear

Reminiscences of CCS first Chairman. This is the fourth of a series of articles by Mr Kuo How Nam (founding member and former Chairman of Credit Counselling Singapore). How Nam’s articles are scheduled to be published on first Fridays of the month.

Our educational talk on “Responsible Use of Credit” includes a segment on how you know if you have a debt issue.  This may be surprising but our experience with borrowers shows many individuals need to have a reality check.   

I believe there are two psychological factors at work - overconfidence and fear.   

Our observation is that many borrowers do not look at their total debts but rather at the monthly minimum payments which they need to make.  Many borrowers are over-confident in their ability to service debts.  People assume their salaries will continue to increase, and that there will be annual bonus or incentive payments.  There is a phenomenon called “debt creep” in which a person’s debts slowly grows and monthly minimum payments increase correspondingly.  Even if debts increase, so long as the borrowers can pay the minimum monthly payments, they think they are okay.  But any shock to income or unexpected urgent payments may result in non-payment of monthly repayments and with high interest charges, and other penalty charges, a debt can grow very quickly since these are all compounded monthly.   

Credit cards can be given only to individuals who earn at least $30,000 per annum.  So, we can say that credit card holders have higher income, better jobs, and higher education.  A CCS survey found that distressed borrowers with higher debts scored higher in financial literacy than those with lower debts, this could mean that the former are overconfident in managing credit.  A NUS study measures self-appraisal of self-control by 3 groups – distressed borrowers, the general population and university undergraduates.  Surprisingly distressed borrowers scored highest in their self-appraisal of their own self-control.  In short, distressed borrowers think they have good self-control, but this is only an illusion.  This delusion about their personal self-control and over-confidence increases temptation to over-consume and reduces risk aversion to debt. 

The other factor is fear.  This is when the borrower misses out on monthly repayment, he will receive many collection calls and letters, and becomes unable to respond or do anything positive to resolve his problem.  When collection calls and letters are ignored, this forces more drastic action by the creditors including the commencement of legal action leading to bankruptcy.     

We had a client who came to the office with 2 bags of unopened letters from banks.  When asked why, he simply said he was too scared to open them.  Some borrowers shared they threw such letters away.  I recently received a call from a lawyer friend who asked if CCS could help his friend, a professional, who chose to ignore all communications and found out later that he had been bankrupted without his knowledge.  Unfortunately, bankruptcy is a matter for court appointed bankruptcy administrator to manage.  CCS hopes to prevent borrowers from reaching this stage as restructuring will not be feasible and the person’s credit record is also blemished by the bankruptcy petition. 

So, the advice to individuals is to be careful when incurring debt.  A debt incurred for current consumption must be paid off with future income which is uncertain.  Recognise the problem early and act before it gets from bad to worse. 

If you are facing a debt issue and would like to seek assistance from CCS, attend 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, 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.

This article was contributed by Kuo How Nam.

Published 7 October 2022.