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SAGE Talk: Insights into the Credit Card Business

Reminiscences of CCS first Chairman. This is the seventh 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.

What drives the credit card business?

The answer is simple – Volume…

Firstly, Credit Card Issuers (CCIs) must push out the maximum number of Cards to as many individuals as possible.  The business is highly competitive, and many individuals hold multiple Cards from various issuers.  These Cards compete for space in the consumer’s wallets.  CCIs therefore vie to issue more cards to consumers, often tying up with various business organisations like petrol companies and associations.  The overall credit limit does not increase with the number of cards issued, being fixed at 4 months income as stipulated by regulations.  CCIs just hope to crowd out the competition.

Secondly, CCIs need to get their card holders to spend using their cards.  This generates fee income as the Card Issuer gets a cut of the purchase made using their cards.  So the more the consumers spend, the more fee income.  No wonder there are all sorts of rewards, cash back, discounts, special offers like 1 for 1 deals at dining outlets.    The Card Issuer funds a free float as purchases are accumulated during the billing cycle and a monthly statement sent out, with the due dates being 2 to 3 weeks after the statement date

The icing on the cake for all CCIs comes from consumers who do not pay their bills in full.  CCIs have conveniently given their consumers the flexibility of just paying the minimum monthly amount, usually pegged at 3% of the monthly bill.  Interest however is hefty, and can be as much as 28% pa., compounded monthly.  If payment is not made in full, the Card holder loses the free interest float from his spending and interest is charged from the date a new purchase is made.

Credit Card Issuers try to maximize their profits by adjusting their risk parameters for their consumer portfolio.  They do not make money if every consumer pays their bills in full or if consumers do not pay their bills at all.   In the first instance, no interest is earned while the debt is written off for the second case.

So, a happy balance will be a portfolio composed of consumers who will use their cards to spend, with enough consumers not paying their bills in full, thereby being charged interest, but at the same time not to the extent that they are financially insolvent, and the debt is written off totally.

I did mention financial zombies in the last article which are people being stuck in a situation where they do not have sufficient income and resources to fully pay off their credit cards outstanding in full and end up being stuck paying interest for a protracted period, paying high interest charges and not seeing their debts reduced in any significant amount.

With interest charges of 28% pa and a write off rate of around 4-5%, the loan aspect of the business is a very profitable one.  The actual writes offs, after recoveries, is believed to be even much lower than 4-5%.

Hence, as we can see, volume is paramount for the credit card business.  There are high costs setting up the business and the volume of card numbers issued, spending and rollover balances are key success factors in running a successful Credit Card business.

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.

CCS also conduct monthly Facebook Live webinars on topics such as prudent financial management and responsible use of credit. Follow CCS Facebook page to stay updated of our webinars and events.

This article was contributed by Kuo How Nam.

Published 6 January 2023.

The opinions expressed in this article are those of the author, and do not necessarily represent the views of Credit Counselling Singapore. The content on this website is for general information only. It is not intended to constitute or be relied upon as financial or credit advice. You should consult a qualified financial consultant if you require financial advice.