An article in the Straits Times reported that younger Singaporeans in the 21 to 29-year-old age group have the highest default rate compared to other age groups when it comes to loans.
According to numbers from DP Credit Bureau, 7.54% of people in the 21 to 29-year-old age group default on their credit card loans compared to the average default rate of 3.88% across all age groups. Of those who do not default, I wonder how many people actually roll over the debt (do not pay in full) and incur the excessive interest rates of credit cards.
A credit card can be a very useful tool if used correctly. If you pay all your credit bills on time, you are essentially getting a free short term credit line. Do it for all your bills every month and it would be like a perpetual free credit line. Not to mention the discounts and credit card points you get.
On the other hand, using it for instant gratification with the intention of paying the minimum payment every month can lead to a snow-balling of debt with devastating effects.
Other kinds of loans such as overdraft, mortgage and motor vehicles also show the same statistical relationship.
A higher default rate means that young people are spending more than what they can really afford. This disturbing trend of “spend what you have not earned” and not having the means to repay them doesn’t bore well for the future.
My friend (belonging to the 21-29 age group) was telling me that she would prefer using cash for making purchases rather than a credit card. Her spending habits usually involves zeroing out her bank account by the end of the month and living paycheck by paycheck.
If she used a credit card for a purchase, she would most likely end up spending the money in the bank (or part of it) that was supposed to be used to pay for the item. So, she will end up spending more. Good thing she knows herself well and hopefully, she will not fall into any debt trap in the future.
For people in this category, having a credit card can be very dangerous indeed.