Annual income requirement for cardholders too low

THE RM2,000 monthly salary requirement for new credit card approvals did not go down well with one of my teh tarik mates.
Last Saturday, while having breakfast in Sentul, our topic of conversation switched from the Japan nuclear crisis to Bank Negara Malaysia's revision of the minimum annual income requirement for new credit card applications, from RM18,000 to RM24,000.

My friend felt that the RM2,000 monthly pay requirement was too low.

He suggested that the minimum requirement be tagged at a monthly salary of RM2,500 or even RM3,000. The revision does not make it too difficult to own a credit card, he said.

"Even making those who wished to own two cards to have an annual income of RM36,000 per annum will not help reduce credit card debt problems," he added.

It is not difficult to see what he is driving at. To give a credit card to someone who earns RM2,000 a month is asking for trouble, especially for those who are living in the city where the cost of living is high and the temptation to spend aplenty.

Simple calculations will show why.

Subtracting 15 per cent from one's monthly pay, say RM2,000, for mandatory deductions like the Employees Provident Fund and Social Security contributions will leave the wage earner with about RM1,700 to take home.

Take away a third of this for accommodation needs, and he/she will be left with about RM1,000 to spend.

Remove another RM300 for monthly travel expenses (which is not enough if he/she owns a car) and he/she will be left with about RM700 monthly.

This translates to about RM25 per day left for other expenses such as food, cigarettes, phone top-ups, entertainment, Internet access, and sundry purchases.

This is based on the assumption that the wage earner does not have other commitments such as housing, car, education or personal loans to repay. Otherwise, it will not be long before the credit card owner gives in to the temptation and starts living on credit.

If statistics are anything to go by, one should also be concerned that 50 per cent of 3.2 million credit card holders have annual incomes of below RM36,000 as quoted in the recent news report. It would be interesting to know how many of these card holders owe their banks, how much, and for how long. Even more interesting is how many of them have been blacklisted and are on the verge of bankruptcy.

The credit card can only encourage prudent financial planning if one manages one's spending well. But how many people use the credit facility responsibly and resist the temptation of not making purchases using income yet to be earned? The poor spending habit is further compounded by the fact that one only needs to pay a small fraction of the total debt monthly to continue using their plastic cash.

And when emergency expenses hit those with high credit card debt, they have no choice but to borrow from friends or even loan sharks to stay afloat.