Employed as a manager in Dhahran, Saleh obtained two credit cards with combined limits over SR60,000. Then he purchased a new car on installment.
Living well above his means, Saleh eventually maxed out his credit cards.
Desperate to avoid default, he took out a personal loan for SR150,000 to consolidate his debt. Relieved of worry, with his credit card limits fully restored, Saleh decided to go on a brief vacation — all expenses charged of course.
This story is awful, but it’s just one of many. Across the Kingdom, tales of self-inflicted credit card misery are becoming more commonplace. The Saudi market is a huge growth area for financial cards and many adults are discovering for the first time both the privileges and responsibilities associated with credit cards.
To be fair, the majority of Saudis continue to shy away from any financial instrument that is potentially interest-bearing. Consequently, in the Kingdom, debit cards and charge cards are much more popular than credit cards. However, as the trend toward electronic payment grows, the number of credit card holders is certain to increase. Financial cards offer consumers a convenient, safe option of paying anytime, anywhere and for all types of purchases, without having to carry around large sums of cash. In the case of credit cards there is also the confidence of knowing that purchases may be paid for over time, if such need arises.
According to Shaun Rashid, GM Saudi Arabia, MasterCard International, currently there are more than 200,000 MasterCard credit cards and approximately 2.5 million Maestro global debit cards in circulation in the Kingdom. Iain Jamieson, GM Saudi Arabia, Visa International revealed that as of March 2003, 350,000 Visa credit cards and 1.9 million Visa debit cards, such as Visa Electron, had been issued in Saudi Arabia. American Express was invited to participate in this article, but they did not make information available by deadline.
A report on financial cards in Saudi Arabia from Euromonitor stated that almost 6 million financial cards were in circulation in Saudi Arabia at the end of 2001,with 85 percent of all card transactions in the Kingdom made with a debit card.
For those Saudis who do hold credit cards, there appears to be a disturbing lack of knowledge about the fees and penalties associated with the cards, especially the monthly revolving credit percentage to be paid on all transactions carried forward. Also, it is extremely difficult to get local banks to state the annual percentage rates (APR) on their credit cards. A credit card with a monthly revolving percentage of 1.97 percent does not sound terrible. But mention that the APR on locally issued credit cards runs from 20-24 percent, plus annual service fees, and people are shocked.
The APR on a personal loan from a local bank generally runs 6-9 percent.
Due to this misunderstanding of the APR, many cardholders mistakenly make only the minimum monthly payment on their credit card bills. An informative feature at Bankrate.com, “Paying the Minimum,” asks, “Is your money being sucked into a compound interest sinkhole?” That’s what happens if only the minimum payment is made monthly on a credit card bill. For example, a person runs up SR10,000 in charges during an annual vacation. Then, monthly if he only pays the minimum five percent payment on a credit card with an APR of 20 percent, it would take 7 years to pay off the SR10,000 and the interest charges accrued would be nearly half the original debt.
Local credit card holders are also unaware how quickly a credit card might wreck their financial standing. According to a cardholder agreement from a local bank, if the settlement of the monthly credit card bill is overdue for two months the individual’s name is added to the “C or Defaulters List, which is circulated to all banks. If an individual goes three months without credit card bill payment, it is impossible to get off the C List until the entire outstanding balance on the credit card is paid. Both MasterCard and Visa clearly stated that they do not issue cards; set annual fees on cards; determine annual percentage rates (APRs); solicit merchants to accept cards or set their discount rates. Rather, member financial institutions manage the relationships with consumers and merchants.
“As a payment system, Visa does not issue cards, nor does it encourage overspending. Visa firmly opposes uncontrolled debt and works with its member banks to provide guidelines on managing cardholders’ credit history,” said Jamieson. “It is a fact that having a credit card is a responsibility and hence calls for careful management of expenses while making optimum use of funds made available...Cardholders must realize that credit cards are not an endless source of money...As the name implies — credit cards involve banks having the confidence to give a cardholder credit.”
More Saudis are being given credit, but unfortunately Saudi Arabia lacks certain facilities generally found in nations where credit has long been commonplace. There are no credit counselors in the Kingdom. When an individual requires debt management assistance, local banks are in the uncomfortable position of advising clients while trying to protect their own corporate interests. In addition, the awarding of credit by banks is based on general standards not specific realities. There are no “positive” lists in the Kingdom — only defaulters are tracked. This must change. “As evidenced by the success of comprehensive credit information in mature markets, it is helpful to consumers to be able to prove their credit worthiness to banks and therefore qualify for even greater limits and high-end products,” commented Rashid. “The banks use certain criteria to assess the financial capabilities of their existing and potential customers. With the help of a “robust list,” it should make that process even simpler.” Jamieson agreed, “Yes, we would definitely encourage it.
We have worked with our member banks in a number of markets to help in the establishment of credit bureau services. We think the existence of a full service credit bureau in any market will be beneficial to all concerned — consumers, banks and other lenders.”
