New credit card regulations will get financial institutions to be frank
I refer to the report, “Rules on credit cards, loans to be tightened from Dec 1” (Sept 12).
The measures provide checks and balances to encourage informed decision-making by credit card users and financial institutions, based on a holistic assessment of borrowers’ creditworthiness and debt repayment capacities.
Credit card users here keep up well with repayments. Deputy Prime Minister Tharman Shanmugaratnam stated in a Parliamentary reply this week that credit card default rates are below 0.2 per cent across all age groups.
Seen in this context, the Government is acting as a choice architect, proactively structuring the borrowing environment so individuals are influenced to exercise prudence in credit card usage.
Making the cost of borrowing more apparent is a key thrust, via disclosure of the total amount and time needed to fully pay off debts based on the minimum monthly rate, and the amount that would accumulate by the end of six months if no payment were made.
This helps borrowers choose providers holistically in light of their other financial commitments, beyond the temptation of easy, immediate and sizeable credit.
Critical legal theorists like Roberto Mangabeira Unger may think the wealthy use the law as an instrument to maintain their place in hierarchy, and that reform is necessary to address the inequitable bargaining power maintained by a market economy based on the “freedom of contract”. His idea seems appealing in the context that financial institutions dictate the terms of credit plans, from interest rates, repayment periods and penalties on default.
But the measures demonstrate how laws can take a non-interventionist approach in nudging people towards better informed decisions, while leaving their freedom of choice intact. The reduced information gap between borrowers and credit card providers also equalises their bargaining powers.
As Harvard Law School professor Cass Sunstein wrote in Nudge: Improving Decisions about Health, Wealth and Happiness, this allows potential consumers to RECAP, or Record, evaluate and compare alternative prices.
A financially sound borrower, who uses credit cards prudently, is less likely to find himself at the mercy of opportunistic financial institutions.
The disclosure requirement also raises financial institutions’ service standards in advising their clientele. This augurs well for sustainable, value-added client relationships, given their expertise and experience with patterns of borrowing.