Rate ceiling hike
I am pretty sure that most of us now are doing a bit of pencil pushing to determine the budgetary allocation for some of our holiday spending and shopping using the credit card.
More or less, we have already come up with the idea on the amount of budget we set aside for an item purchased on lay-away, then, voila something came up that could turn turtle our spending pattern.
As the first days of the year passed swiftly by, on Friday the 13th the monetary authorities jacked up the monthly interest rate ceiling on credit cards from two percent to three percent.
The ruling has yet to take effect since the Bangko Sentral ng Pilipinas (BSP) has yet to comply with the publication requirement, but once enforced the policy will definitely affect consumers’ finances.
Ouch! Without being biased as a consumer, from what I’ve learned, a credit card is a powerful spending tool that allows a holder to manage his finances. This financial flexibility is much appreciated, especially if you have an urgent need to purchase certain item but you temporarily have inadequate resources for such. And, you opt for a lay-away or installment plan.
Increasing the cap on maximum monthly interest rate consumers can pay on their credit card debt by a full percentage point is hurtful, particularly at this time when most of the economists believe that inflation rate will remain elevated. The three percent monthly cap is equivalent to 36 percent annually. Comparatively, it’s 24 percent a year at two percent per month.
Such a policy is virtually anti-consumer for allowing Filipinos to pay higher interest on their credit card debt.
However, in the first place, there should be no cap on interest rates as the cap is detrimental to us, consumers, in the long run.
From where I stand, this policy is a double-edge sword. While the ceiling would rein in on the holder’s spending, it would lead to credit-card issuers limiting their products to Filipinos of good financial standing at the expense of first-time borrowers and subprime borrowers.
As a student of banking and finance, I’ve learned that the interest rate a consumer pays on his credit card debt largely depends on his income and track record as a borrower.
Those who have sufficient income and can prove they can pay their debt on time usually receive lower interest rates because they are less likely to default on their debt.
However, for those who can’t satisfy these two conditions, they’re slapped with higher interest rates on the assumption that they are highly likely to fail in paying back their debt. Therefore, having the cap makes it harder for first-time borrowers and subprime borrowers to get accepted in their credit card applications.
This is understandable as this is part of risk governance since banks are mandated to set aside funds as a buffer for defaults.
During the pandemic, credit cards became a handy financial tool, pushing the level of non-performing loan ratio (NPL) of banks to 10.1 percent in November 2020, eight months after the pandemic declaration. The NPL, though, eased to 5.7 percent by end July 2022, closer to pre-pandemic levels.
Still, I’m puzzled on how interest rates are being pegged. I hope the yet to be issued circular on the increase in interest rate cap could include an explanation on this.
From the banking industry’s side, the cap is making their credit card business less profitable given that they are inclined to offer their products to a smaller base of customers, only those with good financial standing.
This may put a dent on the acceptance of plastic money among us. At the moment, available data indicate that credit card penetration in the country is beyond desired, at a skimpy two percent.
Latest statistics showed that the number of Filipinos owning credit cards based on the latest value from 2021 stood at 8.09 percent against the world average based on 121 countries of 22.26 percent.
In the US, there are 1.1 billion credit cards as of last year with 83 percent of Americans owning at least one plastic money, though, the average American has 3.8 credit cards.
As the wheels of business continue to grind, and given the potential that credit cards have and its enabling financial freedom, the increase in interest rate could dampen activities in a consumption-led economy.
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