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SAGE Talk: Insights into the Credit Card Business Part 2

Reminiscences of CCS first Chairman. This is the eighth 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.

In running the business all credit card issuers (CCIs) faced two problems.  There is a natural attrition to the card holders pool as members retire or stop using their cards for various reasons.

Card issuers have to continuously undertake anti-attrition activities and also market for new members in an already saturated market to maintain market share. 

 Marketing campaigns are expensive and can result in new applications from thousands of applicants.  Most applications will not even survive the first review round of meeting regulatory standards and checks for poor credit and payment behavior.  Easily more than 50% of applications will be rejected outright. 

This is why most card members do not pay annual fees.  The annual fees lost due to  an unhappy card holder who wants to return his card is less than the acquisition cost of a new member.  

CCIs have access to a tremendous amount of data about their card members.  Firstly they have socio-economic data such as educational levels, income earned, the type of housing, geographical localities of homes and places of work, and family details like marital status, number and age of children etc.  Then there is data from the spending patterns of card holders, their paying behavior and the data on debtors who do not pay in full. 

The data is fed into a credit scoring system to help CCIs evaluate and approve card members.  When there is a large customer pool of hundreds of thousands of individuals, given a realistic credit scoring system, one can make fairly accurate predictions about how the card member population will behave.  You can estimate the amount of spending, the proportion of card members who will pay in full and those that will not, thus incurring interest charges.    One can even estimate the defaulters’ rate and write offs.

Obviously the lower the score, then more applications can be approved.  With more members, spending and the use of credit will also correspondingly increase.  But at the same time, there will be more defaulters and a higher charge off rates.  The CCI has to decide the risk parameters it is prepared to accept and work out the optimum score that will balance risks with reward.  

This is where new credit card issuers can come to grieve.  They lack any historic data and have to depend on a generic data base provided by a credit scoring professional firm.  Also, they need to be more aggressive to build up the card base quickly.  They tend to attract more marginal customers from other banks who want additional credit facilities, with adverse effects on their bad debts.

Credit scoring systems can be affected by extraneous events.  Big financial events like the Asian Financial Crisis and The Global Meltdown in 2008 can affect economic activity and jobs.  The same applies to SARS and Covid-19.  Regulatory changes to consumer credit rules can change the dynamics of the business by for example changing the credit lending rules. 

Individuals therefore need to keep a clean credit record as all consumer lending is aggregated by the Credit Bureau Singapore (CBS) which maintains the total banking relationships of an individual, the outstanding and credit and payment behavior over the last 12 months. 

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 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.

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 3 February 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.