There was an interesting article in The Wall Street Journal yesterday: Indonesia is clamping down on banks and their customers, severely limiting the number of credit cards and the credit line any one person may have. (Subscription required; email me for a copy.)
Apparently Indonesia is behind in the acceptance of credit cards relative to most parts of Asia so banks see it as a prime opportunity to find new customers and make money.
I don’t know how much of this is paraphrased for mainstream reporting, but it appears that many of the benefits in Indonesia come in the form of discounts at local merchants. Just as I have one card for groceries, one for hotels, one for airlines (and sometimes multiple cards depending on the individual company), people in Indonesia will walk around with a dozen cards to save 10% on gas, 15% on groceries, and so on.
And, just like in the U.S., the banks know they lose money on these discounts but hope to make it up if someone becomes a long-time customer and starts carrying a balance at interest rates of 35% or more. This is why I always recommend you do not apply for rewards cards if you can’t pay it off each month. I’m not talking about churning or applying for multiple cards. I mean DO NOT APPLY. At all. Banks make money off the interest and fees. I have no problem paying an annual fee if I’m getting some benefits, but that’s quid pro quo. No one makes you pay interest. It’s a decision you make each time you charge more than you can repay.
Indonesia’s government has similar qualms about the growing use of cards among its citizens, so starting this year you must be 18 or older and have a monthly income of $300 or more. Sounds reasonable. If a person makes under $1,000 a month, only two cards are permitted. Okay… In addition, the combined credit limit may not exceed three times a person’s monthly income. Ha! I have several individual cards that each have a credit limit higher than that. I could buy a house.
Many people will have to cancel cards to comply with the new limits, but I actually agree with these laws. Even if I have excess amounts of available credit, I’ve never really come close to exhausting it. The median individual income in the U.S. is about $33,000 per year, or $2,750 per month. Does the typical person really need to borrow more than $8,000 for discretionary spending? Could he or she really be expected to pay that back in a reasonable period of time?
I don’t see laws like this coming about any time soon in America, but already our government is moving to require more disclosure from banks about exactly how long it will take for consumers to pay off their debts and how much interest they’ll pay in the process. Those are good changes. Credit is important to encouraging demand and fostering commerce. It’s not unreasonable to ask for interest to pay back purchases made on credit.
But people also need to learn how to use credit wisely. Looking at the recent financial crisis, I’m not sure that America has done a very good job of that in the past. It’s good to see countries like Indonesia are at least trying to take proactive measures as their citizens get used to a new form of payment, and perhaps they may even be rescinded with time.