Personal Credit

Smart Tips on Personal Credit
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- Personal credit record
  - An individual consumer will have a credit record in a consumer credit database once he/she has used a credit product such as credit card, personal loan, car loan, etc, offered by banks and financial institutions. More comprehensive credit information about a consumer in the database helps banks to assess the consumer’s credit quality more accurately.
  - A credit report generally reflects an individual’s credit and repayment record (including default repayment records), bankruptcy and other public records (e.g. litigation for debt recovery), and records of enquiry by banks or financial institutions in the last two years. If a repayment defaults for more than 60 days, the consumer credit database will retain the default record for five full years from the date of full settlement. There is also a credit score ranging from A to J, where A is the highest score.
  - When reviewing applications for personal credit products (e.g. credit cards), banks consider various factors, which normally include the applicants’ credit reports.
- Implications of a bad credit record
  - A good credit record may lead to a better interest rate and terms. In contrast, a consumer may be subject to a higher interest rate, or get a smaller loan approved, or even his/her loan application may be rejected if his/her credit record is not good.
  - A bad credit record may also have negative impact on non-financial matters of an individual. For example, in the job market, applicants’ credit records are also reviewed by some employers when assessing the applicants’ suitability for certain types of positions (e.g. accounting, credit analysis and approval-related work, etc.). Employers may have doubts about the applicants’ eligibility if their credit records are poor. Bankruptcy record may affect the approval of licence applications for certain professions, e.g. securities brokers, lawyers, etc.
- As a wise bank customer, you should pay attention to the following smart tips when using personal credit products:
  - Applying for several credit cards or personal loans simultaneously may imply the applicant’s urgent needs for money. This may affect his/her credit score negatively.
  - Always make timely and full repayments for personal credit products. Otherwise, interest on late payments will be imposed and the borrower will be kept being reminded to repay.
  - Note the fees and charges when using personal credit products, e.g.
    
    Don’t assume that “zero interest rate” or “full interest waiver” stated in personal loan promotional materials means there is no borrowing cost. Don’t just focus on the “monthly flat rate” and think that the borrowing cost is really low as the monthly interest rate is barely over 0%. Use the Annualised Percentage Rate (APR) to compare personal credit products offered by different banks.
    
    If you intend to make an early repayment, check with the lending bank whether early repayment charge and any other fees will be imposed, and then compare this with the amount of interest to be saved before making your decision.
    
    Don’t just make minimum payments in settling credit card bills. Beware of the snowball effect of interest accumulation in making minimum payments. If the outstanding balance is not fully repaid on time, new transactions will immediately incur finance change.
Smart Tips on Personal Loans
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As a prudent bank customer, you should remember the following tips when applying for personal loans:
- Dos:
  - Before applying for a personal loan, you should understand thoroughly the terms and conditions, including types of loans, tenor, repayment schedule, monthly repayment amount, interest rate, method of interest calculation, and other related fees and charges. If necessary, you can enquire the bank’s staff or ask them to illustrate how the charges are calculated with reference to a mock loan amount. According to the Code of Banking Practice, in any advertising and promotional material for a banking service that includes a reference to an interest rate, banks should also indicate the annualised percentage rate, where relevant, and other relevant fees and charges; and provide full details of the relevant terms and conditions on request.
  - Compare the personal loan products offered by different banks using the Annualised Percentage Rate (APR). APR is a reference annualised rate that reflects the interest and other related fees and charges (such as handling charges and service charges) charged on a banking product (such as credit cards and personal loans). APR reflects the actual borrowing cost.
  - After borrowing, remember to repay your loan on time to avoid “late payment charges” and additional overdue interest charged by your bank. Late payment records of borrowers are maintained in the consumer credit data bureau. They will directly affect the borrowers’ loan applications in future and the interest rates for the loans.
  - If you intend to make an early repayment, you should check with the bank concerned whether any early repayment charge and any other fees will be imposed, and the amount of principal that you have repaid. Compare the early repayment fees and charges with the amount of interest to be saved before making your decision.
  - If you have difficulty in repaying the loan, you should discuss with your bank promptly and explore other repayment arrangements.
- Dont's
  - Don’t just rely on the information provided in personal loan promotional materials. Don’t assume that “zero interest rate” or “full interest waiver” means there is no borrowing cost. Don’t just focus on the “monthly flat rate” and think that the borrowing cost is really low as the monthly interest rate is barely over 0%. You should refer to the “annualised percentage rate” which can accurately reflect the actual borrowing cost.
  - Don’t just calculate the repaid portion of principal by simply multiplying the monthly repayment amount by the number of repayments that you have made. Even though the monthly repayment amount is the same throughout the loan tenor, more interest will, in general, be included in earlier repayments, and less on principal. You should ask your bank if you want to know how much principal you have repaid.
  - Think carefully before applying for a loan and avoid over-borrowing. Remember to repay on time after taking out a loan to avoid additional expenses on finance charges.

Types of Personal Loans
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Personal loans offered by banks are mostly unsecured loans, that is, borrowers are not required to put up any personal assets as collateral for the loan. As such, unsecured loans typically have higher interest rates and shorter tenors than secured loans (such as a mortgage).

When considering whether to approve a personal loan application, the bank concerned will take into account the applicant’s background, occupation, income, financial condition and credit history.

Currently, there are mainly two types of personal loans, namely, instalment loans and revolving loans:

Instalment Loans

Interest for the total loan amount will normally be calculated based on a monthly flat rate. The borrower will repay the loan monthly with a fixed amount according to the interest rate, repayment schedule and repayment amount agreed with the bank.

Revolving Loans

Interest is calculated on the draw-down amount on a daily basis. The borrower can draw down, in whole or in part, the loan facility and repay, in whole or in part, the borrowed amount any time at his discretion. The available loan amount will automatically increase after each repayment so that the borrower can redraw the loan again. In general, a minimum monthly repayment amount is set for revolving loans. Moreover, banks will review the repayment record of the borrower regularly and may adjust the interest rates and/or loan amount accordingly.

What is Rule of 78?

Individual banks use different ways to apportion interest and principal in the monthly repayment amounts. The following example illustrates how the interest is apportioned in each monthly repayment throughout the loan tenor according to the Rule of 78:

A 12-month loan of HK$200,000 at a monthly flat rate of 0.31%

Monthly interest = HK$200,000 x 0.31% = HK$620

Interest for the full term = HK$620 x 12(instalments) = HK$7,440

Monthly repayment amount = (HK$200,000 + HK$7,440) / 12(monthly payments) = HK$17,287

Based on the Rule of 78, the amount of interest paid each month =

Interest for the full term

Remaining number of monthly payments

Sum of the number of monthly instalments in the loan
(For 12 monthly payments, it will be 12+11+…+2+1=78)

The calculation is as follows:

	Interest	Principal Repaid
The 1^st month	HK$7,440 x 12 / 78 = HK$1,145	HK$17,287 – HK$1,145 = HK$16,142
The 2^nd month	HK$7,440 x 11/ 78 = HK$1,049	HK$17,287 – HK$1,049 = HK$16,238
. . .
The 11^th month	HK$7,440 x 2 / 78 = HK$191	HK$17,287 – HK$191 = HK$17,096
The 12^th month	HK$7,440 x 1 / 78 = HK$95	HK$17,287 – HK$95 = HK$17,192

The above example shows that nearly 30% of the interest for the full term is repaid in the first two monthly payments.

By the same way, the above rule is also applicable to loans of other repayment periods. For a 24-month loan, the sum of numbers from 1 to 24 is 300 (24+23+22+21+20…+1=300). 24/300ths of the total interest is apportioned as the first month’s interest portion, 23/300ths of the total interest is apportioned as the second month’s interest portion and so on until the 24th month, at which time 1/300th of the total interest is apportioned as the last month’s interest portion.

Similarly, for a 36-month loan, the sum of numbers from 1 to 36 is 666 (36+35+34+33+32…+1=666). 36/666ths of the total interest is apportioned as the first month’s interest portion, 35/666ths of the total interest is apportioned as the second month’s interest portion and so on until the 36th month, at which time 1/666th of the total interest is apportioned as the last month’s interest portion.

Smart Tips on Responsible Borrowing
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There are many types of loan products in the market, such as personal loans, tax loans, etc. You should remember the following tips when applying for loan products:
- Dos:
  - Be responsible and handle personal loan products properly. You should commit to repaying after borrowing.
  - Repay the loan (or for card products, outstanding balance of retail purchase and/or cash advances) on time to avoid late payment charges and additional overdue interest charged by banks.
  - Before applying for any loans, you should have a clear understanding of your financial condition, daily expenses and actual borrowing needs. You should also assess your repayment ability and avoid over-borrowing.
  - Understand the terms clearly before committing to a loan.
  - To borrow or not to borrow? Borrow only if you can repay!
- Don't:
  - Do not overspend and get yourself in debt. This will affect your credit record.
- Points to Note:
  - If your repayment defaults for more than 60 days, the consumer credit reporting institution will retain the default record in the database for five full years from the date of full settlement.
  - A good credit record may bring you better interest rate and terms. In contrast, you may be subject to a higher interest rate, or get a smaller loan approved, or even your loan application may be rejected if your credit record is not good.
Addressing Debt Problems
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Signs of debt problems

If you find yourself with an unmanageable amount of debt, it is important to take action swiftly before the problem escalates. Personal debt problems are usually foreseeable, and here are some common early signs of debt difficulties:
- Card spending exceeding your repayment ability, and you are regularly paying only the minimum amount due on your bills
- Persistent borrowing to cover your daily expenses
- Settling your debts by borrowing high-interest loans
- Inability to make your monthly repayments on credit card, loan, or overdraft
Addressing debt problems

Generally speaking, if you encounter genuine difficulties in repaying bank loans, you should contact your creditors as soon as possible to discuss the problem. It will be in the mutual interest of you and your creditors to find a solution, such as by extending the repayment schedule or rescheduling the debts. If multiple creditors are involved, an Interbank Debt Relief Plan (IDRP) may be one of the possible solutions to your debt problem. All retail banks (including digital banks) and major money lenders that offer consumer credit products have participated in the IDRP framework. They will work together to see if a viable debt restructuring proposal can be drawn up for you.

An IDRP can help you:
- Renegotiate the monthly repayments and terms of your unsecured debt repayments, without incurring any fees or charges
- Combine these repayments and pay them as a single monthly instalment
- Avoid action from collection agents, wage garnishments, or legal actions
- Avoid bankruptcy and its consequences, such as difficulty in obtaining credit in the future, travel restrictions, etc.
- Get back on track towards financial stability and build a positive future credit track record.
You may refer to the Consumer Guide about IDRP and the Financial Health Leaflet for more information.

Contact your creditors as soon as possible to find out your options. While bankruptcy remains an option, it has far-reaching consequences and the decision to file bankruptcy should not be taken lightly.