International Journal of Academic Research in Accounting, Finance and Management Sciences

Volume 2, Issue 4 (2012)

ISSN: 2225-8329

Usage of Credit Cards Beyond Limit : A Case Study of Younger

Generations in Malaysia

Kaviyarasu ELANGKOVAN

ABSTRACT

Undergraduate Student
University Putra Malaysia
E-mail: kavi.economicsupm@gmail.com

Young generations around 30s who hold numbers of credit card and personal loans are
an example of todays Malaysia. Many people claims that the socio economy status of
someone is reflected by the number of credit cards they own. Without realizing the
consequences of the usage of credit card beyond their limit, more and more young
peoples aged around 30s were declared bankrupt due to credit card debts. This research
intended to explore the factors that contributed to the bankruptcy of younger generation
due to credit card debts. The findings of the research provide useful outcomes to younger
generation as well as public in order to increase their awareness regarding the
bankruptcy issue that could be seen as a new disease. An update on the insolvency
trends, performance and recent initiatives undertaken by Malaysia Department of
Insolvency (MdI) were also reviewed in this study. Insolvency Trends and the
administrations consisting of individual bankruptcies and bankrupts cooperation were
also studied thoroughly.

KEY WORDS Bankruptcy, credit cards, young peoples

JEL CODES

F65

1. Introduction
Credit cards were first issued in the USA in the early twentieth century. In Malaysia, the
first card was introduced in the mid-1970s (Zafar U. Ahmed & et al., 2010) [1]. At the early on
period, credit cards were only issued to professionals or successful business persons by card
issuing companies. However, with the passage of time, eligibility criteria for obtaining credit cards
have been changed because credit cards are now easily obtained by individuals regardless of their
income or other measures of financial wellbeing. As a result, the number of cardholders reached
to about three million by the turn of the last century (Zafar U.Ahmed & et al., 2010)[1].The
increase of credit card has brought many side effects to the users especially for the people aged
below 30. This is because credit card influence them in making the excessive spending because it
easier and convenient for user to pay with credit card rather than bring cash with them. As a result,
in March 2009, outstanding debts from credit card holders amounted to RM15.719 billion were
reported. Then, by the year2009 outstanding credit card debts accounted for 1.35 percent of the
total loans outstanding or 11.41 percent of the total consumer credit (Bank Negara Malaysia, 2009;
as cited in Zafar U. Ahmed & et al., 2010)[1].Thus, its shows that increase in the number of credit
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ISSN: 2225-8329

card holders seeking bankruptcy records over the years were also reported. The people below 30
are the leading aged group that has been declared bankrupt because of credit card debts (Credit
Card Debt and You: Under-30s under Siege, Malay Mail Insight, 2009) [2].
In the bankruptcy survey of the Panel Study of Income Dynamics, the most common reason
that households gave for filing for bankruptcy was high debt/misuse of credit cards33 percent
gave this as their primary reason for filing. A 2006 survey of debtors who sought credit counseling
prior to filing for bankruptcy found that debt was even more important: two-thirds were in
financial difficulty because of poor money management/excessive spending (National
Foundation for Credit Counseling, 2006). In addition, all of the empirical models of the bankruptcy
filing decision have found that consumers are more likely to file if they have higher debt.
Domowitz and Sartain (1999) found that households are more likely to file as their credit card and
medical debt levels increase. Gross and Souleles (2002a) similarly found that credit card holders
are more likely to file as their credit card debt increases. In Fay, Hurst, and White (2002) found
that households are more likely to file as their financial gain from filing increaseswhere the
financial gain from filing mainly depends on how much debt would be discharged in bankruptcy.
International comparisons also suggest a connection between credit card debt and
bankruptcy filings. Ellis (1998) uses the comparison between the United States and Canada to
argue for the importance of credit card debt in explaining the increase in bankruptcy filings.
General credit cards were first issued in 1966 in the United States and in 1968 in Canada. In
Canada, both credit card debt and bankruptcy filings increased rapidly starting in 1969. But in the
United States, usury laws in a number of states limited the maximum interest rates that lenders
could charge on loans, which held down their willingness to issue credit cards. U.S. bankruptcy
filings remained constant throughout the 1970s. In 1978, however, the U.S. Supreme Court
effectively abolished state usury laws in the Marquette decision, and after that, both credit card
debt and bankruptcy filings increased rapidly in the United States.3 Mann (2006) documents a
similarly close relationship between credit card debt and bankruptcy filings in Australia, Japan, and
the United Kingdom.
Livshits, MacGee, and Tertilt (2006) use calibration techniques to examine various
explanations for the increase in bankruptcy filings since the early 1980s.They find that only the
large increase in credit card debt combined with a reduction in the punishment for bankruptcy can
explain the increase in bankruptcy filings since the early 1980s.Finally, mortgage debt has also
grown rapidly since 1980, although the growth rate of mortgage debt is well below the growth
rate of revolving debt; that is, real mortgage debt per household tripled between 1980 and 2006,
while real revolving debt per household grew by a factor of 4.6 over the same period. The increase
in mortgage debt and the increase in bankruptcy filings are related in several ways: First,
homeowners often file for bankruptcy to delay mortgage lenders from foreclosing on their homes.
Second, although mortgage debt is not discharged in bankruptcy, homeowners may want to file
because having their consumer debt discharged makes it easier for them to meet their mortgage
obligations.
Finally, debtors may file for bankruptcy if their mortgage lender has already foreclosed and
the house has been sold for less than the amount owed. In this situation, debtors in some states
are liable for the difference, but the debt can be discharged in bankruptcy. For more discussion of
these interactions between mortgage debt and consumer debt, see Berkowitz and Hynes (1999)
and Lin and White (2001).

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ISSN: 2225-8329

Overall, the increase in credit card and possibly mortgage debt levels since1980 provides
the most convincing explanation for the increase in bankruptcy filings in the United States. But
adverse events and debt levels interact with each other in explaining the increase in bankruptcy
filings because, as debt level increase, any particular adverse event is more likely to trigger
financial distress and bankruptcy.

2. Findings of Study
Given the apparent connection between the expansion in credit card debt and the rise in
bankruptcy filings, its useful to review how markets for credit cards have evolved in recent
decades. My discussion here draws on Ausubel (1997), Evans and Schmalensee (1999), Moss and
Johnson (1999), Peterson (2004), and Mann (2006). Until the 1960s, consumer credit generally
took the form of mortgages or installment loans from banks or credit unions. Obtaining a loan
required going through a face-to-face application procedure with a bank or credit union employee,
explaining the purpose of the loan, and demonstrating ability to repay.
Because of the costly application procedure and the potential embarrassment of being
turned down, these loans were generally small and went only to the most creditworthy customers.
This pattern began to change with the introduction of credit cards in1966, since credit cards
provided unsecured lines of credit that consumers could use at any time for any purpose. The
earliest credit cards were issued by banks where consumers had their checking or savings accounts.
Because most states had usury laws that limited maximum interest rates, banks offered credit
cards only to the most creditworthy consumers and card use therefore grew only slowly. But after
the Marquette decision in 1978, credit card issuers could charge higher interstates, and they
expanded in states where low interest rate limits had previously made lending unprofitable.
Over time, the development of credit bureaus and computerized credit scoring models
changed credit card markets, because lenders could obtain information from credit bureaus about
individual consumers credit records and could therefore offer credit cards to consumers who had
no prior relationship with the lender. Lenders first offered credit cards to consumers who applied
by mail, and then began sending out pre-approved card offers to lists of consumers whose credit
records were screened in advance. These innovations reduced the cost of credit both by
eliminating the face-to-face application process and by allowing lenders to expand nationally,
which increased competition in local credit card markets. From1977 to 2001, the proportion of U.S.
households having at least one credit card rose from 38 to 76 percent (Durkin, 2000).
Over the same period, revolving credit increased from 16 to 37 percent of no mortgage
consumer credit, which means that credit card loans gradually replaced other forms of consumer
credit. This shift from installment to revolving loans meant dramatic changes in the terms of
consumer debt. Secured and installment loans typically carried fixed interest rates and fixed
repayment schedules. Credit card loans, in contrast, allow lenders to change the interest rate at
any time and allow debtors to choose how much they repay each month, subject to a low
minimum repayment requirement. Consumers who repay in full each month use credit cards only
for transacting; they receive an interest-free loan from the date of the purchase to the due date of
the bill. In contrast, consumers who repay less than the full amount due each month use credit
cards for both transacting and borrowing; they pay interest from the date of purchase. If
borrowers pay late or exceed their credit limits, then lenders raise the interest rate to a penalty
range and impose additional fees.

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ISSN: 2225-8329

Credit card issuers compete heavily for new customers by mailing out unsolicited, preapproved credit card offers: in 2001, the average U.S. household received45 of these offers (BarGill, 2004). Over time, competition among issuers has led them to offer increasingly favorable
introductory terms and increasingly onerous post-introductory terms. The favorable introductory
terms include zero annual fees, low or zero introductory interest rates on purchases and balance
transfers, and rewards such as cash back or frequent flier miles for each dollar spent. The
favorable introductory terms encourage consumers to accept new cards, while the rewards
programs encourage them to charge more on the cards and the low minimum repayment
requirements encourage them to borrow. The format of the monthly bills also encourages
borrowing, since minimum payments are often shown in large type while the full amount due is
shown in small type.
Minimum monthly payments are lowtypically the previous months interest and fees
plus1 percent of the principlewhich means that debtors who pay only the minimum each month
still owe nearly half of any amount borrowed after five years. After the introductory period, terms
become much more onerous: the average credit card interest rate is 16 percent, interest rates rise
to 24 to 30 percent if debtors pay late, and penalty fees for paying late or exceeding the credit
limit are around $35. This pattern of credit card pricing implies that issuers make losses on new
accounts and offset their losses with profits on older accounts (Ausubel, 1991, 1997; Bar-Gill,
2004).
Credit card issuers have also expanded their high-risk operations by lending to consumers
who have lower incomes, lower credit scores, and past bankruptcy filings. The percentage of
households in the lowest quintile of the income distribution who have credit cards rose from 11
percent in 1977 to 43 percent in 2001(Durkin, 2000; Johnson, 2005). Three-quarters of bankrupts
also had at least one credit card within a year after filing (Staten, 1993).The shift of consumer debt
from installment debt to credit card debt, combined with the pattern of credit card pricing, has
made consumers debt burdens much more sensitive to changes in income. When consumers
incomes are high, they are likely to pay their credit card bills in full, and therefore their debt
burden is low and they pay little or no interest. But when incomes decline, consumers are likely to
pay late or to pay the minimum on their credit cards, so that their debt burdens increase and they
pay much more in interest and fees. Although credit cards allow consumers to smooth
consumption when their incomes fall, the cost of doing so is extremely high and may cause some
debtors to enter a state of ongoing financial distress.
3. Insolvency Trends and the Administration (Report by Department of Insolvency
Malaysia)
As reflected in the Figure 1, the total number of individual bankruptcies registered from
2005 to March 2011 is 90,898. 3. In the first quarter of 2011, 20,555 creditors petitions were filed
in court to initiate bankruptcy proceedings and this marks an increase of 0.78% from the first
quarter in the previous year where 20,395 creditors petitions were filed in court.

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ISSN: 2225-8329

Figure 1. Yearly Petitions and Orders made from 2005 to 2011

Generally, Figure 1 further indicates a sharp increase of 40.11% in the number of creditors
petitions filed in 2010 in contrast to the number of creditors petitions filed in 2009. 17,490
petitions were filed by creditors in 2009 whereas as many as 87, 645 petitions were filed by
creditors in 2010. In consequence to the increased number of creditors petitions filed in 2010, the
ending of 2010 shows an increase of 11.65% in respect of individual bankruptcies registered as
compared to the number of individual bankruptcies registered in 2009.
A slight increase is shown in the number of Receiving Orders (RO) and Adjudication Orders
(AO) made in the beginning of 2011. The first quarter of 2011 denotes an increase of 7.27%
number of registered bankruptcy cases as 4,841 RO and AO were made in comparison to 4,513 RO
and AO made in the first 3 months of 2010.

Figure 2. Cases Resolved Based on Categories from 2005 to March 2010

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Parallel with the Tenth Malaysia Plan and the New Economic Policy introduced by the
government, Malaysian Department of Insolvency (MdI) strives to provide an effective
administration of bankruptcy cases in ensuring the enhancement of public service delivery system
and efficiency. Out of the total number of bankruptcy cases administered, a total of 23,147 cases
had been resolved via 3 modes that is, discharge by way of court order, discharge via certificate of
Director General of Insolvency and annulment of the Adjudication Orders, in the period between
2005 to March 2011.
As indicated in Figure 2, majority of cases had been resolved by way of discharge via
certificate of Director General of Insolvency made in pursuant to section 33A, Bankruptcy Act 1967
in which 11, 342 (49%) bankruptcy cases were resolved. 8, 101 (35%) bankruptcy cases were
resolved by way of annulment of adjudication orders and 16% of cases were resolved when 3,704
bankrupts had obtained their discharge by way of court order.

4. Bankrupts Applications in pursuance to Section 38 of Malaysian Bankruptcy Act 1967

To recap, Section 38 of the Malaysian Bankruptcy Act 1967 restricts undischarged
bankrupts from inter alia, leaving Malaysia, carrying on any business and maintaining any action in
court, without the previous permission of the DGI. Bankrupts can obtain the permission of the DGI
against any of those abovementioned restrictions by submitting their applications to the
administering branch and it will be processed within 7 days from the date of application, as
promised in MdIs client charter.

Figure 3. Number and types of application made by bankrupts from 2010 to 2011
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ISSN: 2225-8329

Figure 3 depicts the number and most common types of applications made by bankrupts.
In the first 3 months of 2011, 1,735 applications to obtain the permission of DGI for various
reasons were made and 100% of it was approved. Applications made to leave Malaysia in the first
quarter of 2011 shows a slight decrease of 3.7% when only 1,585 applications were made, as
compared to the 1,644 applications made in the first quarter of 2010. 102 applications made by
bankrupts to obtain the permission of DGI to carry on any business were approved in the first
quarter of 2010 in contrast to 153 similar applications made in the first quarter of 2010, which
marks a decrease of 33.33%. Nevertheless, applications made by bankrupts to obtain the
permission of DGI to maintain court action indicates an increase of 30.6% whereby 48 bankrupts
made the application within the first 3 months of 2011 in comparison to only 37 applications made
in the first 3 months of 2010.

Figure 4. Statement of Affairs filed by bankrupts from 2009 to 2011

The level of bankrupts cooperation can mainly be indicated in the number of Statement of
Affairs filed, as against the number of individual bankruptcies registered in a year. A bankrupts
cooperation in filing the Statement of Affairs is imperative in ensuring an efficient administration
of each bankruptcy case. It is also essential in considering any of the applications made by the
bankrupt during his/her period in bankruptcy.
As shown in Figure 4, between first quarters of 2009, 2010 and 2011, a noticeable steady
increase in filing of Statement of Affairs by bankrupts is recorded in each quarter. 48.8% increase
in filing of Statement of Affairs is shown from the first quarter of 2010 in which 2, 615 bankrupts
had filed their Statement of Affairs in the first as compared to only 1,757 who did so in the same
period of 2009. The cooperation given by bankrupts continues to increase by 6.3% when 2, 780
bankrupts had filed their Statement of Affairs in the first quarter of 2011.

4. Conclusions
As the bankruptcy due to credit card debts has increase especially among people aged below
30, serious effort should be taken to curb this issue. Thus, researcher has come out with several
recommendation or suggestion regarding this issue. Firstly, it is recommended to encourage
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people aged below 30s to use the debit card rather than credit card in order to reduce the debt
and bankruptcy among them. Debit card will debit money directly from the owner account which
prevents ones to spend more than his or her ability. Whereas, credit card allow the card holder to
borrow money from the issuing bank and there will be interest charges from the credit card
company on the purchases that had been made. Thus, the higher debts can increase the chances
to be declared as bankruptcy among credit card holder. Therefore, using debit card is the wise
action when making the purchases since it will only allow the card holder to spend within their
limit. Other steps that can be considered is to increase the knowledge about credit card and
bankruptcy among people aged below 30s. Providing the credit education to the people aged
below 30 as well as public can help them in managing their money wisely and use the credit
correctly to avoid debts. It can be done through financial seminar, talk from professional person or
forum. The credit education can help ones to manage their financial, debt and set up a better
planning for the future and it should begin as early as possible. Then, it is recommended for the
government or any non government organization (NGO) to aggressively come out and implements
the campaign in order to create the awareness regarding the credit card debts. For example, in the
campaign should encourage public as well as people below 30s to bring their cash or use debit
card rather than use the credit cards when buying things. By doing so, the public and people aged
below 30s can think twice before purchase any product or service. Through this kind of campaign,
it can increase the awareness regarding the credit card debts implication and the advantages and
disadvantages of having the credit card.

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