Credit Cards: Boon or Bane?

A Thesis Presented to
The Thesis Committee
UM Tagum College, Graduate School
Tagum City

In Partial Fulfillment
Of the Requirements for the Degree
Master in Public Administration

JOHN REY D. ABELLANIDA

May 2016
 CHAPTER I

INTRODUCTION

Rationale

In our society today, there seems to be a great preoccupation with money and

ownership of material possessions. While this seems like an assumption, the idea of

wealth and object attainment has consumed Filipinos in repetitive debts.

In the past 25 years, credit card has become almost universally held product as

shown by an increase in credit card ownership from 4% to 77%. Credit card ownership

is so widespread among consumers in some of the rich and economically developed

countries that penetration rates are approaching 100%. Credit cards are similarly

becoming increasingly available in many parts of developing countries. This trend

reflects the growing popularity of the credit card as a preferred mode of payment for

goods and services in lieu of cash, checks, and other (Johnson, 2007, Abdul-Muhmin

& Umar, 2007).

In Asia, the liberalization of the financial sectors has resulted in the rapid

increase of credit card companies. In the Philippines, credit cards provided by the

banking industry are an emerging source of household credit. The credit card

outstanding loans in the country grew to Php 190.55 billion at the end of the year 2013,

with an average annual increase of 7.89% from 2008 (Gan et al., 2008, Tan, 2009,

Banko Sentral ng Pilipinas [BSP], 2014).

Using credit cards as a substitute for cash has benefits such as convenience in

paying goods or services, immediate source of financing and facility for online

purchasing. Consumption becomes easier since individuals do not have to go to

automated teller machines very frequently to withdraw cash nor do they have to carry
a lot of cash; both actions could reduce the risk of theft. However, the misuse and

abuse of using credit cards can have many negative consequences, ranging from

spending beyond what the budget allows to, paying high interest rates on past due

accounts on the part of consumers (Cayanan & Ledesma, 2005).

On the part of the credit card providers, defaults on consumer payments may

ensue. Among the specific negative impacts of credit card misuse on the part of the

cardholder are the penalties applied for failure to live up to the terms of use, years of

financial debt resulting to low credit scores, personal bankruptcy, and increased level

of stress that could cause a decreased level of psychological well-being. A more

devastating impact is that high levels of debt have been reported as major stressors

that have led credit card users to commit suicide (Holub, 2002, Norvilitis & Santa

Maria, 2002; Roberts & Jones, 2001).

PURPOSE OF THE STUDY

The study focuses on the use and awareness of credit cards among Filipinos

from different sector in Tagum City and the risk associated in using credit card

payments. In addition, this study will also test if there is a relationship of overspending

habits among credit card owners.

RESEARCH QUESTIONS

This research study basically aims to know if credit cards are beneficial or not,

and if it encourage consumer spending among Filipinos. Specifically, this study hopes

to answer the following questions:

 1. What are the experiences and challenges of the credit card owners in

Tagum City?

2. How do the credit card owners cope up with the stress of increasing loans

in each swipe and how do they resist over spending?

3. What are their insights in owning credit cards?

SIGNIFICANCE OF THE STUDY

The results of this study will enable the growing number of credit card owners

in Tagum to be informed of the advantages, disadvantage and proper use of credit

cards.

On the other hand, this study may also provide insights for lawmakers on the

implications of consumer debt on the country’s welfare and their constituents, and

thus, provide regulation and legislation that is more appropriate in ensuring the

consumers rights.

Further, this study may provide an understanding for the general public on the

problems that result from overspending, or spending beyond what one can afford.

Finally, this study may spread awareness on the new threats in credit card

safety.
 Definition of Terms

For the purpose of clarification, the important term used in this study

have been defined. The following terms are:

Bane. Refers to an idea that is a cause of great distress or annoyance.

Boon. Refers to an idea that is helpful or beneficial.

Cardholder. Refers to a person who has a credit card or debit card.

Cash: Refers to a ready money.

Consumer. Refers to a person who buys goods and services.

Credit. Refers to a money that a bank or business will allow a person to use

and then pay back in the future.

Credit Cards. Refers to a small plastic card issued by a bank, business, etc.,

allowing the holder to purchase goods or services on credit.

Credit Card default. Refers to a person who has been delinquent on his/her

credit card payments.

Interest. Refers to a charge for borrowed money generally a percentage of the

amount borrowed.

Loan. Refers to a money lent at interest

Overspend. Refers to spend more than the expected or allotted amount.

Risk. Refers to the uncertainty of a return and the potential for financial loss.
Delimitations and Limitations

This study is limited to the City of Tagum where the selected respondents are

located. The testimonies and concerns of the cardholders were described and

documented.

The scope of the study focused on the challenges and experiences of the

cardholders and their ability to cope up in different situations they were in. The factor

that might serve as a limitation to this study is vast number of credit card holders in

the city.

Organization of the Study

This study is a data gathering about Credit Card Owners and their perceptions,

insights, and sentiments they have been with. This would be primarily based on in-

depth interview and focus group discussion that will be conducted by the researcher.

Chapter 1 features the salient points of taking the perceptions, insights and

sentiments of the Cardholders. The said purpose will be answered by the research

questions posted. It also includes the significance of the study, definition of terms,

limitations of the study and organization of study.

Chapter 2 presents a review of related literature and relevant research of the

study to justify the need of the study, the research questions that will be answered

based on data that will be gathered from in-depth interview and focus group

discussion.

Chapter 3 depicts detailed description of the methods and procedures that

comprise the research protocol utilized for the study which includes the research
design, the role of the researcher in the conduct of the study, and the research

participants. The research procedure is also discussed in detail including the data

analysis and so with the trustworthiness, credibility and ethical considerations.

Chapter 4 discusses the results of the study based on the views, perceptions

and benefits gained by the children respondents under the said program collected

through an in-depth interview and focus group discussion. The data collected were

then categorized according to its emerging themes with tables and supporting

statements.

Chapter 5 offers a summary and discussion of the researcher’s findings, as well

as the conclusions. Attention was given to addressing the implications for practice, as

well as providing recommendations for future research anchored on the developed

themes during data analysis.

 CHAPTER II

REVIEW OF RELATED LITERATURE

Many had resisted taking out a credit card for a considerable length of time,

shunning the idea of taking on debt for as long as they could. Eventually, however,

many found themselves giving in to the bombardment of offers that came their way

and so it was often a far from conscious or considered decision (Jigsaw, 2014).

Credit cards tended to be used to fund ‘treats’ such as clothes, holidays and

home improvements or furniture and for any larger unexpected expenses such as car

or home maintenance (indeed for those who took a conscious decision to take out a

credit card, it was the larger unexpected expenses that were often the trigger). The

insurance that came with many cards gave consumers peace of mind when making

larger purchases and many enjoyed the loyalty points/rewards earned through high

usage of their card (Jigsaw, 2014).

The card very quickly became a support in emergencies and helping with cash

flow problems. For many, a credit card allowed them to access a certain ‘lifestyle’ that

would otherwise not be possible. However, this living beyond their means could trigger

feelings of guilt over their use of the card and worry as to how they were going to make

the payments long after the treat has been enjoyed. Further, with many consumers

just making the minimum payment each month, they were making little progress in

reducing the balance or ever paying it off totally. This carried balance inevitably meant

that those not on 0% or low interest rates would be paying considerable interest on

their balance, but most were unaware of the implications of their behavior (Jigsaw,

2014).
 The UK Card Association’s 2013 report noted that 58.9 million credit cards were

in circulation at the end of 2012. This had fallen from a peak of 71.5 million in 2005,

as consumer spending both fell and tended to be switched to debit cards during the

recession. However, data released by the UK Card Association covering the first three

Quarters of 2013 suggest that consumer spending on plastic cards is on the increase

again, as economic recovery begins and consumer confidence increases (Jigsaw,

2014).

Steady growth was recorded in the Filipino card payments channel during the

review period (2008-2012), as the number of cards in circulation increased at a

Compound Annual Growth Rate (CAGR) of 7.65%, rising from 40.8 million in 2008 to

54.8 million in 2012. This growth was primarily driven by the prepaid cards category

which registered the highest growth rate at a CAGR of 17.26%. The card payments

channel is dominated by four large domestic banking groups - Metrobank, Banco de

Oro, Bank of the Philippine Islands (BPI), and Land Bank of the Philippines.

In the Philippines, the rate of consumer defaults almost triples the average in

Asia (Estayo, 2008). For the last five years, the average non-performing loans or past

due accounts amount to Php18.02 billion. Defaults of payment among cardholders

could lead to higher credit expense due to compounding interests and penalties.

Worsening the problem, the credit card interest rates in the country are currently

among the highest in the world (Tan, 2009). On average, consumers end up paying

3.5% interest rate per month or 42% per annum on past due accounts while the

average lending rate of commercial banks only ranges from 6.21% per annum in the

start of first-quarter of 2013 to 5.72 % per annum at the end of the forth-quarter of

2013 (BSP, 2014). The high-interest margin is imposed by banks on credit cards

because credit risk is inherent in the industry; credit card transactions do not require
collateral and high transaction costs can be incurred if banks go to court in the case

of defaults (Cayanan & Ledesma, 2005). Therefore, the credit card industry becomes

problematic if credit cards are given to the consumers who do risky credit card

activities. Despite the situation, there is still an immense marketing campaign among

credit card issuers in the country. Credit card defaults became a consequence of the

expansion of the credit card market beyond the select professionals and members of

the Philippine elite. The increase in credit card usage among consumers is due to the

developing nature of the financial system in the country (BSP, 2014).

In Taiwan, the Asian Pacific Post in 2006 reported Taiwanese credit card slaves

committing suicide or turning to crime to pay off their debts. As it were, more than

400,000 Taiwanese were unable to clear their credit card debts entailing heavy

personal costs. The Philippines on the other hand has been relatively protected from

the adverse effects of the recent global financial crisis because of its ‘minimal

exposure to structured financial products (Pasadilla, 2008). Furthermore, the high level

of remittances from Overseas Filipino Workers (OFWs) has propped up the country’s

economy; and Philippine banks have generally been more conservative than their

counterparts elsewhere. Thus, while the Bangko Sentral ng Pilipinas (Central Bank of

the Philippines) noted the increase of credit card related activities, the authorities are

less worried about the rising credit card delinquency rates, confident that increments

in credit card delinquency are still controlled at a low level. But while the conservatism

of Philippine banks and the controlled level of credit card delinquency may make it

unproblematic to the country’s financial community, its impact on those at the brink of

default cannot be overlooked.

The credit card is a three-way legal relationship that includes: 1) the customer

or the cardholder, who makes the purchase; 2) the seller/vendor or merchant

establishment, where the items or services are purchased; and, 3) the banks or the

credit card companies who issue the card and consolidate all transactions made by

the customer through the credit card. Clearly, the credit card system has prevailed and

even expanded over the second half of the 20th century because the advantages

perceived by the actors engaged in this three-way relationship seem to outweigh the

risks. On the side of credit card holders, credit cards are deemed convenient. They

mean doing away with check books and carrying large amounts of cash since a single

card can be used to purchase goods and services. Furthermore, the credit card’s

flexible payment and installment features extends the consumers’ purchasing power,

allowing them to avail of items or services that they could not normally afford with their

salaries or wages. The convenience of credit cards sometimes masks the downside

of relying on them. It takes much discipline, for instance, to plan and budget spending

around payment obligations to ensure that one does not spend beyond one’s capacity

to pay and does not fall behind payment schedules. Many cardholders tend to gloss

over the interest and floats that the revolving credit would incur, as well as the annual

fees that issuing banks/companies require for the continued use of the credit card

(Fuentes, 1998).

For the merchants, affiliation with credit card companies provides a good

opportunity to increase sales. Customers are not only encouraged to buy items and

services from them, but the merchants themselves also need not worry about payment

defaults by the cardholder since the credit card companies, rather than the merchants,

run after defaulting customers. Indeed, once a transaction has been made and the

cardholder signs the statement/receipt, the items and/or services purchased are just

as good as cash. Merchants merely have to present the signed statements in order

for the issuing banks to pay them the amount due, minus the discount fees. The
downside for merchants and merchant establishments consist of the high rates of

discounts which the credit card companies can impose on them. Aside from this, there

is also the risk of fraud and counterfeit cards which are in fact not easily detected by

the card devices (Fuentes, 1998).

As Fuentes pointed out, Banks that offers cards to their customers enjoy a

competitive edge. Banks and credit card companies earn very much from the

collection of floats and charges on interests, defaults and penalties incurred by

revolving credits alone. Other sources of revenues would also include annual or

membership fees, as well as discount rates given by merchant establishments as

payment for the handling of customers’ purchases. Interestingly, credit card

companies do not only lure people into spending through the credit card, but the same

clientele can also serve as prospects for other bank products they offer (i.e. auto loans,

housing loans, etc.). The gains from credit cards that have spurred intense competition

among banks and even their branches seem to outweigh the disadvantages of running

a credit card business 1) the risk of fraud and card counterfeiting; 2) the erratic cost of

money loaned, which is somehow determined, among others, by currency exchange

rates, inflation, etc.; and, 3) the expensive operations of card centers as well as

investments in customer service (Fuentes, 1998).