Credit cards are incredibly popular in Singapore, especially due to the high amounts of rewards that issuers provide to their members. In fact, the number of credit cards in circulation has grown by 130% since 2004 to over 9 million. But, recent data release from the Monetary Authority of Singapore suggests that this rapid growth in credit card usage may be going overboard. As people rely on debt to finance their consumption, banks are starting to take some heat in form of bad credit card debt.
Bad Credit Card Debt Nearing 10-Year Peak
According to the latest data release from the Monetary Authority of Singapore, bad credit card debt that was "written-off" jumped 16% to S$27.9 million in March compared to S$24.1 million in February, after gradually declining in 2017. In fact, the current level of written off card debt on a per card basis was only 4% lower than its peak level in the last decade.
Bad Credit Card Debt Write-Off Per Card in Singapore
What this means is that less consumers were suddenly less willing or able to repay their credit card balances in 2018. Typically, banks take a loss and "write-off" delinquent loans that are more than 30 days overdue and cannot be recovered. To help prevent such phenomenon, the government introduced a financial instrument called debt consolidation plans in 2017. This instrument may have contributed to the ease in growth of written off card debt in 2017 by helping consumers consolidate their various personal loans and credit card debt into one that could be more easily repaid at a lower interest rate. The fact that bad card debt rising so sharply again after DCP has had its initial effect suggests certainly has some negative connotations for the economy.
Why Could This Be Happening?
While there are many possible reasons why consumers are suddenly defaulting on their credit card debt, we can try to build some theories and understand the phenomenon through digging into data. First, it seems that consumers' reliance on credit card has increased meaningfully in the last year or two. For instance, total billings per card in Singapore has risen rapidly starting in 2016, now reaching an all-time high level above S$500 per card. This suggests that people may be using cards to spend more than they could previously afford.
Total Credit Card Billings Per Card in Singapore
Secondly, card debtors might be starting to receive the financial pressure of rising interest rates. As the US Fed began its rate hike in 2015, 3-month SIBOR rose to its highest level since 2010. This could be making it more difficult for borrowers to repay their card debt as their interest obligations increased. As an evidence, the increase in rates also has been leading to higher credit card delinquencies in the US as low-income borrowers have been struggling to keep up with the increase in the cost of their debt.
Historical Trend 2000-2018: 3-Month SIBOR vs US Treasury
What Does This Mean for Consumers and the Economy?
While it's still too early to tell if credit card debt and consumer balance sheet will continue to deteriorate, this initial jump in 2018 is a good reminder that consumers should be careful about borrowing to make purchases. In reality, credit card debt and its deterioration alone is not an immense problem for the economy because it makes up only 2-3% of total household debt in Singapore. However, the rise in credit-card delinquencies could be a harbinger of more potential problems. If credit card delinquencies continue to rise, then consumers may start to feel bigger impacts on their finances and begin defaulting on their loans when the effect of higher rates begins to permeate through other products and markets. When the cost of their debt rises, consumers find themselves with less money to spend on their daily needs, which drives down general consumption and demand in the economy. While debt driven consumption growth may seem good to both to economy and for people who get to enjoy things that they can't readily afford, it can result in a massive hangover especially when rates are rising.