Credit card trap - devil for youngsters

The younger generation tends to repay their credit debts later than the banks' payment due date, a report found, highlighting they are weak on financial management and personal finance.

TransUnion, a credit rating company, said there are 2,800 credit card holders, who aged below 23 years old, repay their debts later than the due date in 2018, increased 60% year-on-year. Meanwhile, the total amount of their debts raised from HK$240 million to HK$790 million over a year.

“Youngsters like to buy anything on the Internet by credit cards or mobile payment apps nowadays. They would easily enter to the “credit card trap” as they did not think clearly and consider their financial ability before shopping,” a TransUnion research report said.

In addition, another survey conducted by the Investor and Financial Education Council (IFEC), also found that overspending and credit card debts are the major sources of post-90s’ financial stress.

Credit card debts become major source of financial stress for post-90s, recent survey revealed. (Online image)


Cases of two university students

Both Mandy (alias), a fresh university graduate, and Clara (alias), a university student, fell into the credit card trap, accumulating debts and damaging their credit ratings unconsciously.

They both got the first credit card from banks’ promotion booth on the campus. “I hold a total of 6 credit cards when I was studying year one,” Mandy recalled and added that the reason of holding the cards is because of favouring the card’s design and the reward scheme.

University students could apply for a credit card without job, income and credit history but only their student IDs - meanwhile, ID cards and proof of address.

Credit card holders aged below 23 years old increased form more than 150% from 102,000 in 2017 to almost 260,000 in 2018, which means every youngster holds more than one card, TransUnion said.

Mandy needed financial help from family to repay debt when she was studying in university.


Travel lover who only plan schedule but no budget

Mandy is always shopping online and spent almost HK$3,000 per month. The income from her part-time job can cover the expenses of the online shopping, she said.

However, “I went travel for 6-7 times per year and spent HK$10,000 for every trip in average,” travel lover Mandy said, while she never made budget in advance and didn’t record her expense as well.

Facing the insolvable debts after every jolly trip or shopping, she’s always anxious. At this time, she would place the card statement on the table at home, waiting for her family to help. “They will slightly ask about the spending, tell me no next time, and give me the amount I need.”

Mandy felt regret and stressed every time the bank statement was sent home.

Being spoiled by the family, she couldn’t learn the lesson. Instead, one of her older friends started worrying about her. “Once we were drinking in a bar when I was in year 2, we talked about my card debt and my friend couldn’t help but broke my credit cards by snapping them.” The friend with more social experience admonished her to change the spending habit.

Even Mandy’s friends could not bear to pamper her and one of them physically broke her cards by snapping them.

Moreover, she has no idea about the consequences of damaging her credit rating. “I usually repay the debt on the due date, and still the bank will define me late because of the money transfer time. I’d call the card centre and ask to wave the late charge.” Unfortunately, the late record will not be exempted along late charge.

The situation is getting better since she made up her mind to manage her income and expense by a record and acknowledge her financial ability from that. She is not aware of the related terms such as interest rate and credit rating.

Mandy found the way to control her expense by monthly record on spreadsheet.


Temptation of digital and vicious cycle of Min Pay

On the other hand, student Clara is still bearing a total HK$12000 liability of two cards after only making minimum payments (Min Pay) for the past 3 months. “I like hanging out with friends, dining, movies, go travelling… and I am usually paid by card. Even without cash, I just pay them back by PayMe,” she said.

“It’s just too convenient to enter the amount and pay in few seconds. I can’t think of the consequences at the moment.” Clara regrets afterwards every time. And this time, she hesitates to reveal the debt to family again since she already asked help from them for a few times before.

Clara once owned more than 10 credit cards and all applications occured at the promotion booths on the university campus.


Think twice before easy application

Associate Professor of Economics of The Chinese University of Hong Kong, Chong Tai-Leung suggests students that they should not apply for a new credit card just for the “free gifts” or welcome reward.

“No matter how attractive the gifts are, you still have to think twice before applying for the card,” Chong said. There are always terms and conditions behind the application while you need to fulfil designated amounts of the transaction before getting free gifts.

Youngsters should look into the interest rate, which can be in a range of 8.7% to 40% in the market, annual fee and how many years of exemption, and the interest-free period for you to settle a debt, which can be from 52 to 90 days. Chong suggests youngsters should consider their financial ability and compare different banks’ offers before applying for a card.

Stop the debt from worsening

Henry Chan, Officer of Tung Wah Group of Hospitals Healthy Budgeting Family Debt Counselling Centre, reminds students to keep expenditures within the limits of incomes and pointed out that purchases are only interest-free under the circumstances that the card has no outstanding balance. If you didn't settle all the debt last month, the new acquisition would be charged with interest.

Besides, Min Pay will accumulate debts at a horrible percentage. For example, if you owe to the bank $10,000 at a monthly interest rate of 2.5% and do it in Min Pay, it will costs you 97 months, around 8 years to settle, even you have no more new transaction in the period. The endless repayment amount including interest expense will be 2.5 times of the original balance.

Seek help from family and school

“Youngsters, as an adult, should bear their responsibility to repay all the debts by working on part-time jobs or being private tutors,” Chong said.

He added that they should seek for help from their family members and staffs from college’s student affair office, if they are not able to repay the debt, while he stressed that they should not believe the debts consolidation loan can simply help you solve all the problems.

Moreover, TransUnion reminds the cardholder that even they pay the debt late for one day, their late payment record would be kept by the banks permanently and it would affect the credit rating for next 5 to 7 years.

The record may lead their mortgage application to become unsuccessful when they purchase flat and apply for mortgage plan in the future, while they may also receive a higher interest rate offer when they lend money from the bank or financial institution.

《The Young Financial Post 新報人財經》




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