Financial institutions around the world are watching the affect of RM50 tax recently announced in Malaysia. This is perhaps the first government effort to regulate consumer spending in a way that encourages people to slow their spending.
The Secretary-General of the Muslim Consumer Association of Malaysia announced the new tax was intended to limit the number of credit cards held by consumers. He claims the tax is to address problems of people who have 5-6 credit cards and encourage them to use only one or two credit accounts.
The explanation goes on to say this is to the consumers’ benefit and it will reduce credit card use because it makes it more costly to pay the account’s finance charges as well and pay the RM50 tax for multiple credit cards.
Growth of the Credit Card Industry
The U.S. saw an explosion of credit card use some time ago. Twenty-five years ago you used credit cards for shopping and vacations and for large purchases.
Most people did not use credit cards to pay for groceries or small everyday expenses. Credit cards were cash cows for banks. As a result, consumers were inundated with offers for new credit cards. Standards for qualifying were lowered by banks competing for new credit customers.
The color of your credit card became a status symbol and you were encouraged to carry several cards. At the height of the credit frenzy in the U.S. most consumers had 5-6 credit cards in their wallet.
In Malaysia, the affect of RM50 may be staggering. Malaysian use of credit cards has exploded in the past few years. In 1997, for example, two million credit cards in use by Malaysian citizens. By 2009, over 12 credit cards had been issued.
Credit Card Debt
In the U.S., credit card debt was considered a problem only for those people who used credit unwisely. If you have a decent income and spent your money in a financially responsible way, credit card use was an accepted fact of life.
Why wait to buy something you want when you can buy it today and charge it? After all, your have a good job and will be able to pay off your purchase within a few months.
That may have been how you looked at using your credit cards. It worked until the economy went crashing down and until jobs began to disappear.
The Malaysian government has seen the problems of consumers in other countries where credit card use has increased dramatically. The intended affect of the RM50 tax on credit cards is to encourage people to use only one credit card and hopefully to discourage the populace from creating too much credit debt.
Unintended Affect of RM50 Tax on Credit Cards
The prosperous Malaysian citizen with several credit cards will be able to pay the RM50 Tax should he choose to do so. The tax is an annual fee that is roughly equivalent to $16 US. When average income comparisons are made, a similar tax in the U.S. would be about $50 annually.
The affect of RM50 will be most burdensome to lower income citizens. Credit cards were not difficult to obtain so many people have multiple credit card accounts just as in the U.S.
Wealthier citizens can afford to pay the new tax and those who object to the tax can pay off and cancel some of their credit cards. Working class citizens may have revolving charges on several different credit card accounts.
Though they pay the monthly payments, these group of people do not have the funds to pay off and cancel some of their cards quickly. The affect of the RM50 credit card tax for them is another tax burden to bear.
Response to RM50 Tax
The response of consumers to the RM50 tax on credit cards was universally negative. There was an outcry and many complaints and requests to rescind the new tax which was first imposed in 2009.
The affect of the RM50 credit card tax affected lenders as much as it affected the public. Consumers were canceling 5 of their 6 credits or 9 of their 10 credit cards. Use of credit slowed somewhat as people focused on credit card debt in a ways they had not done before.
In response, larger lenders began subsidizing credit card accounts. Bank Rakyet totally subsidized the RM50 tax while other banks provided consumers with guidelines to follow that would recoup most of the tax.
The guidelines require a certain amount of purchases to be charged per month or a specific number of points to be earned. Consumers who meet the qualifications will have their RM50 credit card tax offset by the lending bank.
Summary
In the end, the affect of the RM50 tax on credit cards may not be what the government intended. The initial response of consumers was to cancel multiple credit accounts. This led to less consumer spending which was not a boon to the country’s economy.
Today, many lenders subsidize the affect of RM50 but those subsidies are passed back to the consumer in the form of higher fees and interest.
The mixed results make it unlikely other governments will actually try to limit credit card debt by imposing a tax on the number of plastic cards you carry.
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