Borrowing Against the Future

In recent months, a number of shocking events related to credit-card debt have come to light. In February, a people-smuggling organization enlisted the assistance of 50 university students who were unable to pay their credit-card bills. In return for money, the students applied for passports which the Mafiosi then resold to a group of mainland smugglers.

Fearing his parents' anger, a college student from Taichung County's Shalu Township who owed NT$200,000 on his credit card attempted suicide as a way out of his predicament.

But it isn't only young students who get caught in the credit-card trap; adults who have been working for years may also find themselves in trouble.

The 30-year-old Miss Chen is an inveterate shopper. Seeing her in new clothes every day and knowing that her salary couldn't support her shopping habits, her colleagues urged her to live within her means. Chen responded by accusing her colleagues of being jealous of her.

According to Chen, she "spoils" herself to compensate for a childhood spent in poverty. But that "spoiling" has consequences. Not long ago, Chen had to take out a second mortgage on her apartment to pay off her credit cards. Soon after, she had maxed out her cards again, and had to approach her bank once more, this time for a personal loan of NT$300,000 to pay off her cards. Chen can no longer cover even her mortgage and loan payments on her NT$40,000-plus per month salary, and so her debt continues to grow.

Credit cards and cash cards can come to your rescue in a crisis-or do they just convert a short term crisis into a long-term one?

The age of easy-payment plans

What is it that allows people to borrow so boldly against the future? Back when virtually everyone in Taiwan was poor, people were reluctant to buy on credit even when in dire straits. Even when Taiwan's economy took off, few people other than those whose businesses had failed took out loans for anything other than the purchase of a home. These days, however, the island's economic doldrums and the growing prevalence of a "payment plan" mentality among consumers have made debt ubiquitous. According to some estimates, the savings rate of as many as 10% of Taiwan's households is now negative, and cash-card loans total more than NT$10 billion.

Some people claim: "Having a credit card means that, unlike Aladdin, we aren't limited to three wishes." And, admittedly, credit cards are similar to magic lamps in their ability to immediately "grant wishes."

The "buy now, pay later" era kicked off in 1950 with Mastercard's introduction of the world's first signature card-printed on cardboard. Since then, "plastic" has become a common means of paying for nearly everything. Credit cards allow people to shop without carrying cash, and their use, especially gold and platinum cards, has become a mark of status.

Chinatrust Bank became the first Taiwanese credit-card issuer more than 20 years ago, and today is the largest issuer of cards on the island. Credit cards have gradually come into vogue here, and they now come in a virtual smorgasbord of flavors. According to the Bureau of Monetary Affairs at the Ministry of Finance, nearly 60 million credit cards have been issued in Taiwan, or three to four cards for every adult on the island. The amount of purchasing being done with these cards is also on the rise-last year Taiwanese rang up more than NT$873 billion on their credit cards.

But credit cards can be used for more than shopping. In 1996, they acquired a new function-lending cash. By February of this year, Taiwan's credit-card holders had used their cards for more than 890,000 cash advances, borrowing a total of more than NT$10 billion.

Eye-catching advertisements stoke the desire to buy, buy, buy! Those who are not aware of what is happening to them can end up digging a hole of binge purchasing that they will never climb out of.

Three loans under one roof

The economic doldrums of the last few years have forced banks to aggressively seek new clients. In doing so, they have shifted the focus of their lending from businesses to consumers. In their rush to extend loans to consumers, the banks have also indirectly fostered a much greater acceptance of the idea of borrowing among the public.

Whether at home, in the office, or even just walking down the street, consumers are being inundated with telemarketing calls from banks:

"Would you like to transfer your mortgage?"

"Do you need a personal loan?"

"Do you want to pay off your credit-card debt?" Credit cards, cash cards, personal loans, home loans, car loans, student loans. . . banks are offering credit in nearly endless varieties. Products range from the "She-Devil" revolving credit account to the "Smart Money Health Insurance Card," all tailored to the needs of particular groups.

The banks' success in promoting such products has led to record levels of lending. According to the Central Bank of China, as of January 31, 2003, outstanding personal consumer loans totaled NT$424.1 billion and outstanding automotive loans amounted to more than NT$70 billion. Both figures represented record highs.

All around us, it seems, people are carrying three loans at the same time-their mortgage, their car loan, and their credit card.

Credit cards are omnipresent these days. Convenient they may be, but beware the unforeseen "credit crunch."

The most compliant of friends

While some people live for today, borrowing ever more to spend on their pleasures, for others small personal loans and cash advances on credit cards have been lifesavers that helped them get through difficult times. But credit-card issuers are in the business to turn profits. Such loans may save people in dire need, but their high interest rates often put people in a different kind of bind.

Five or six years ago, the 40-something Mr. Huang found himself saddled with more than NT$5 million in debt after having acted as a guarantor for another person. For Huang, shouldering that burden marked the start of a nightmare of "borrowing against the future."

Pressed by the bank for payment, Huang repaid a portion of the debt by selling his own home, but had no choice but to default on the remainder. Having done so has made it difficult to for him to take a job with a regular salary (the bank would garnish his wages), and he can no longer hold any assets in his own name.

"I'd never in my life borrowed money from anyone; I thought I should deal with the bank instead," says Huang. However, without proof of income or assets, he was unable to get a cash card. Huang's only options were to take out a personal loan and to take cash advances on his credit cards.

He took a personal loan of NT$500,000 with payments spread over four years. With interest, Huang was obligated to repay NT$750,000. By last year, the nearly 20% interest rate on his credit-card debt had caused that debt to skyrocket from NT$1.1 million to NT$1.8 million.

Credit cards may allow their holders to take cash advances, but the interest rates are steep (nearly 20%), and purchases also accrue interest. In recent years, banks have taken a lesson from the Japanese and begun promoting cash cards for emergency situations which charge a slightly lower interest rate (about 18%).

In July 1999, Cosmos Bank, Taiwan's first cash-card issuer, began promoting its "George and Mary" card as a way to borrow interest-free in a crisis ("George and Mary" sounds like "borrow money interest-free" in Taiwanese, and "resolve a crisis interest-free" in Mandarin). The bank stressed that the card made both borrowing and repaying easy: if repayment was made on the same day the money had been borrowed, no interest was charged, and a card could be approved in as little as 30 minutes. Not surprisingly, cash cards became an overnight sensation. In just three years, Cosmos has issued 1.2 million George and Mary's, which have generated more than NT$56 billion in revenues.

Just recently, well known TV host Tsao Chi-tai did an ad for a cash card. The ad stirred public debate with its claim that "borrowing money is a respectable thing to do." According to Indra Huang, general manager of Ta Chong Bank's cash-card department, the ad originally stated: "If you borrow and repay, borrowing again is easy. Borrowing money is a respectable thing to do." In print versions, the text ran in full, but it had to be cut for the 30-second TV spots, leaving only the line which sparked the controversy. In the end, public opinion forced Ta Chong to change the ad, but not before it scored first and second place finishes in the "best liked" and "most influential" categories of January and February's advertising surveys and boosted the bank's sales.

Cash cards are described as the new "man's best friend." It's easy to get one, and easy to borrow money using one. But the old adage about "no free lunch" has never been more apropos.

Only borrow if you earn

In fact, while cash cards stress their revolving credit lines, their convenience, and how easy they are to get-many banks require only that an applicant be 20 years old and have an ID card to apply-banks do evaluate applicants' ability to repay their loans. In other words, if you want a card, you had better have a job. Card issuers have been using their own systems to establish the credit limits of their cardholders for years. Cosmos Bank, for example, uses a Japanese software package that evaluates an applicant's debt situation, income, age, and gender in making its credit-limit recommendations.

According to Ta Chong's Indra Huang, "Credit limits depend on income." For example, Huang says an applicant with an annual income of NT$700,000 would have a credit limit of around NT$1.5 million.

But not every bank is so accommodating. According to Li Ming-feng, assistant manager of Cosmos Bank's cash-card department, Cosmos rejects 40% of the cash-card applications it receives. Under the pressure of public opinion, in the past six months it has also stopped issuing cards to students. Most current cash-card users are in fact between 25 and 40 years of age.

"Cash cards target a segment of society who in the past wouldn't have been able to do business with a bank," says Huang. He explains that nearly 600,000 Taiwanese households have a negative savings rate, and argues that providing these people with access to normal lending channels (instead of leaving them to the loan sharks and underground banks) is beneficial to society. "Once these people began to get cash cards, the black marketers and underground banks had no choice but to reduce their interest rates."

According to Huang, cash cards have been around for 40 years in Japan. In contrast, the Taiwan market, which is currently worth less than NT$90 billion, is still in its infancy. When one considers that Taiwan's credit-card market is worth NT$200-300 billion, the cash-card market seems to have a great deal of room to grow. Some even forecast that its value will eventually reach NT$400-500 billion.

Repayment is the question

But in American investment firm Morgan Stanley's most recent report on the Taiwanese credit card market (March 2003), the company stated that foreign investors held an extremely negative view of Taiwan's credit-card debt market. They believe that many banks do not have adequate risk-management mechanisms in place, and that the quality of their credit-card debt is deteriorating. An even bigger concern for Taiwan's financial markets is that banks have been too aggressive in offering other types of unsecured credit such as cash cards, which has greatly increased the chances of financial crisis.

In recent years, Taiwan's unemployment rate has been persistently high and salaries have remained flat. Nonetheless, consumer debt has expanded at a rapid clip of 20-30% per annum. In consequence, regardless of whether banks make an effort to control their bad debt by being careful about whom they issue cards to, cardholders are still going to suffer under the burden of the interest accruing on their maxed out credit cards.

Last year, Taiwan's outstanding debt on revolving credit accounts exceeded NT$300 billion. Moreover, a large portion of this debt was owed by Generation Xers.

According to a report by AC Nielson, men between the ages of 25 and 34 are most willing to spend on credit, and their favorite purchases are motorcycles, stereos, and cars. Additionally, a study of credit-card holders conducted in the second half of last year showed that nearly 28% of cardholders rolled their purchase balances over from month to month, and that 15% used their cards for cash advances. In all, then, more than 40% of cardholders carried debt on their cards.

Online on a website that calls itself "The Repayment Hell Club," visitors whose cards are maxed out post messages telling of their travails.

One 28-year old who earns NT$28,000 per month owes NT$870,000. "I don't earn enough to make ends meet and am always trying to scrape together some cash. I'm stuck in repayment hell. . . ." Another poster says, "I got my first card when I was a sophomore in college. When that one was maxed out, I got another. . . . Given my income, I'll never be able to pay off my debts."

Like there's no tomorrow??

Some believe that consumers' acquisition of excessive levels of debt is partly the fault of credit-card issuers, and they therefore believe that the card companies should be much more selective in issuing cards to students who haven't yet entered the working world.

Lin Chiu-pao, manager of Chinatrust Bank's media relations department, thinks that people, including students, should take responsibility for their own actions. "We should foster in children the ability to manage their credit themselves, not take away their rights," says Lin, who believes that punishing an entire group for the actions of a few people who cannot control themselves is unreasonable.

In any case, even granting that borrowing is "respectable," there is nothing respectable in being unable to repay loans. After one goes bankrupt, the banks press for repayment at regular intervals, and in some cases also hire collection agencies to bring more pressure to bear.

In March, a private "credit card crisis resolution corporation" appeared in Taichung claiming that it would pay off the debts of young people whose banks had not yet stopped their cards but who were unable to repay what they owed. The company's clients were required to cut up their cards and sign a guarantee never to make the same kind of mistake again. The only catch was that the company also charged 20% interest on the new loan, an amount higher than that on their credit cards.

Chen Kung (not his real name), a high-level manager at a consulting firm dealing with lending and collections, says that while his firm provides collection services for automobile loans, mortgages, tax bills, and even traffic tickets, their bread-and-butter is credit-card collections. "These days, three or four of every ten cases we get involves credit cards that are in arrears and have been cancelled."

In Chen's view, as a group, young people between the ages of 18 and 25 spend more money than any other segment of society, but have the least earning power. Having seen so many people get themselves into a bind through excessive spending, Chen believes that the more convenient something is, the more dangerous. He notes that credit- and cash-card issuers expect people to use the cards habitually, thereby digging themselves into an ever-deeper hole. Banks are actually much safer places to borrow money precisely because it is more difficult to get a loan from them.

Poor people like spending too!

In an article entitled "Since Wealth Came East," Hao Ming-yi, editor-in-chief at Locus Publishing, quotes American retail analyst Michael LeBoeuf as remarking on the 1950s: "The massive production capacity of our economy required that we adopt consumption as a way of life, that we make a ritual of buying and using goods, that we seek spiritual and personal fulfillment in consumption. . . . We consumed products at an ever-accelerating pace, using them up, breaking them, making them obsolescent, throwing them away. . . ."

Social commentator Nanfang Shuo has also remarked that people used to believe that they should spend only what they earn, but now they give no thought at all to taking on debt. In Japan last year, 215,000 people declared personal bankruptcy. In the US, the figure was 1.47 million. In Hong Kong too, more than 25,000 went broke. "Today's society is oblivious to the steps it is taking towards making excessive consumption a way of life," says Nanfang Shuo. "Moreover, among young people, this culture of excess consumption has become a 'culture of compulsory excess consumption.'"

People today seem to have fallen victim to LeBoeuf's bane. Nanfang Shuo laments: "The 'lifestyle' that grows out of material consumption has taken the 'living' out of life; consumption has become the point." Consequently, people feel perfectly comfortable living an "easy payment plan" life.

"Money's tight, but. . . ."

"Like it? Put it on your plastic!"