Credit Cards Leading To Bankruptcy Finance Essay

ukessays.com/essays/finance/credit-cards-leading-to-bankruptcy-finance-essay.php
Introduction
This chapter provides a review of factors that contribute to the credit cards bankruptcy among the
young executives whether there is a relationship between the factors which are financial management,
pay capability and lifestyles towards the credit card bankruptcy. This chapter also covers the conceptual
framework of the study along with the hypothesis propose.
2.1 Credit card bankruptcy
Jacquelyn Warwick and Phylis Mansfield (2000) stated that the attitude toward credit can worsen credit
card debt and personal bankruptcy. The uncontrollable usage of credit card will lead the user to a bad
condition as the increasing debts will make them declare as bankrupt. Besides that, the increasing of
credit card users also makes the number of bankruptcy increase year by year (Zafar U. Ahmed and et
al., 2007).
In Singapore, overspending on credit, which attracts up to 24 percent of the annual interest rate, is the
leading cause of bankruptcies. In addition, the bank can utilize the database provided by the credit
bureaus to receive credit histories of customers to assess their credit-worthiness, thus better manage
their risks. This is likely to lower credit default and wrongdoing levels, ultimately reducing household
poverty (Lydia L. Gan, Ramin C. Maysami and Hian Chye Koh, 2005). It means that, Singapore had
taken several ways in order to reduce the credit card bankruptcies.
Report to the Congress on Practices of the Consumer Credit Industry in Soliciting and Extending Credit
and their Effects on Consumer Debt and Insolvency, presents a brief history of revolving credit, and
discusses the factors that explain the growth of revolving credit customers from time to time, focused
on the relationship of growth of household debt and bankruptcy. As both rotating credit use and
consumer bankruptcies have grown in recent years, concerns have emerged about whether there is a
causal relationship between the two trends and, in particular, whether the practices of credit card
issuers have contributed to household insolvencies.
Sharon A. DeVaney and Ruth H. Lytton (1995) stated that the term insolvency is often associated with
business entities from household. The concept of solvency and his opponent, bankruptcy, could easily
be defined as has a net worth of either positive or negative. In a way equiry, referring to the bankruptcy
failure to submit timely payment of debts as they mature. This situation can cause increased duties and
a reduction in the share of assets owned. To put it in bankruptcy, insolvency means that the net assets
at fair market value is less than the duty, which can require liquidation of assets through the bankruptcy
court order (Becker, 1992)
Historically, the terms bankruptcy and corporate bankruptcy law represents a different English
language and a different attitude against creditors. Bankruptcy is a voluntary procedure which is
designed to protect creditors through the seizure and the equivalent of the hotel among the creditors of
the debtor. Debtors are often faced imprisonment, at the expense of creditors. The second body of law
is to protect borrowers, which will bring to family state bankruptcy, give them all hotel to the court, and
was released from debtors prison. The debtor remains responsible for their debt.
Rafael Efra (2006) stated that in traditional, American society has seen the petition of bankruptcy
negative. In the 1960s, a number of critics began to voice concerns about dramatic increase in the
filing of the bankruptcy clients in the United States. The critics, especially due to the increase in filing
the alleged decline in morality and shame associated with bankruptcy.
2.2 Factor that contribute to credit card bankruptcy
2.2.1 Knowledge on credit card
According to Hye-Jung Park & Leslie Davis Burns (2005), a dramatic increase in credit card usage in
recent years Korea has been accelerated by the customer to change the Korean society of mass
consumption. Because the number of aggressive market expansion, Korean credit card companies'
came with many campaign strategies with comfortable in using credit cards, that will increased
customers be likely to use credit cards exceeds their ability for re-pay. This situation not only occurs in
Korea only, but can be seen in Malaysia too. We can see that many people attracted to use credit card
nowadays.
Alex Wang (2009) stated that Federal law requiring credit card issuers to provide disclosures in print
ads to convey relevant information to purchase products or services. However, the credit card issuer
may choose to place a disclosure near the bottom of print ads, away from the convincing message, so
that it will not attracting a negative response from the customer. These limitations warrant the studys
investigations on college students attitudes toward disclosures in credit card issuers print
advertisements and the effect of their attitudes on credit card issuers. Financial institutions should
emphasize long-term credit and loyalty resulting from harvesting short-term gains on the aggressive
marketing of credit cards (Joyce K.H. Nga, Lisa H.L. Yong and Rathakrishnan D. Sellappan, 2009).
Thomas A. Durkin (2000) explained about the disclosure requirements have in large part been intended
to help prevent or lessen over extension and other difficulties resulting from a lack of understanding of
credit terms and the consequences of using credit. Assessing consumers knowledge of credit terms
and their use of that knowledge is not a straightforward matter. One question is which term or terms to
focus on. A second question is how, in an interview survey, to determine the accuracy of the
consumers knowledge. In addition, some observers have proposed that the Truth in Lending Act be
amended to require card issuers to disclose to cardholders the period of time necessary to pay off a
credit card balance if only the minimum amount is paid each month.
Researching about level of people knowledge about financial information about credit cards is
essential as we know peoples knowledge about their credit card, credit card limits and credit card
balance will help them to be better in using the cards (Jacquelyn Warwick, Phylis Mansfield, 2000).
Compton and Pfau, 2004 stated that many students who have credit cards with high annual
percentage level, students are waiting longer to pay off the card, the worse it gets. These problems
may develop as a bank or credit card issuer does not display the disclosure included in the application
of their credit cards responsibly. This problem will lead them to bear high debts and lead to bankruptcy
if they cannot re pay the debts (as cited in Alex Wang, 2009)
2.2.2 Financial management
Financial management is one of the most knowledge that people must have. Through the financial
knowledge, people will know how to handle their financial in a right way. Financial education is
increasingly important, and not just for investors. It is becoming essential for the average family trying
to decide how to balance its budget, buy a home, fund the childrens education and ensures an income
when the parents retire. Lacking of financial management skill will lead them to fall under many
problems. Moreover, credit card users must have this knowledge as they play with debts. Financial
knowledge consist of many aspects for example, the daily spend, payment, product price and others.
One of the worrying problems is the lack of financial awareness about the financial planning concepts
and products amongst todays youths (Joyce K.H. Nga, Lisa H.L. Yong and Rathakrishnan D.
Sellappan, 2010). This situation will lead the people cannot control their consumption and over spend.
This will lead to a debts problem.
The results of several latest studies indicate that the credit card industry is dealing with consumers that
consist of many types of consumers who are generally not very educated about financial issues and
terms relating to credit cards (Karin Braunsberger, Laurie A. Lucas and Dave Roach, 2004). In this
situation, many credit card companies take advantage to provide more credit cards to customers as
they can gain profit from them.
Because of the wider acceptance towards the credit cards among the people, most of credit card
companies did not aware towards the credit card users payment capabilities. This situation will lead to
a higher level of problem such debts burden and bankruptcy. Halil Tunah and Ferda Yerdelen Tatoglu
(2010) stated that many consumers use their credit card to spend and satisfy their need as they think
that they can pay back with their future income. Astrid A. Dick and Andreas Lehnert (2009) found that
bank deregulation increased competition among banks for borrowers, leading them to adopt more
sophisticated technology for estimating borrower credit risk. In turn, this allowed previously excluded
households to enter the credit market. Sharon A. DeVaney and Ruth H. Lytton (1995) stated that
renters were almost twice as likely to report having had debt payment difficulties as were homeowners.
The Department for Business, Innovation and Skills (BIS) in United Kingdom wrote in TNS-BMRB
Report, the complexity in understand about the financial aspects of credit had caused led many card
user to simple way to guide their purchase and repayment behavior. Besides that, credit card provider
can increase the customers credit limit without their direct approval. Concerns were made about the
lack of information of potential customers towards the increasing the limit, which customers that have
low financial capability and the potential difficulties that want to reject the increase limit. When this
occurs, the customer will overspend as their limit was increased without their knowledge. So this surely
will lead to high debts and worse, declaring bankruptcy.
Individuals will not be able to choose the right savings or investments for themselves, and may be at
risk of fraud, if they are not financially literate. But if individuals do become financially educated, they
will be more likely to save and to challenge financial service providers to develop products that truly
respond to their needs, and that should have positive effects on both investment levels and economic
growth.
National Foundation for Credit Counseling (2006) stated that Journal of Economic Perspectives 2006
survey of debtors who sought credit counseling prior to ling for bankruptcy found that debt was even
more important, two-thirds were in nancial difculty because of poor money management or excessive
spending (as cited in Michelle J. White, 2007). But adverse events and debt levels interact with each
other in explaining the increase in bankruptcy lings because, as debt levels increase, any particular
adverse event is more likely to trigger nancial distress and bankruptcy.
2.2.3 Lifestyles
Edward Elki (2010) states that, however important the availability of credit is in society, we must be
modest and restrained in our use of it. Living within our means and being circumspect in our risk-taking
are worthy goals both individuals and businesses should strive for. Financing a ashy lifestyle through
easily available credit can lead to disaster.
Caroline Toupin, and Helene Gagnon (2010) explained that in such a situation, credit cards become a
solution to make ends meet. In their daily tasks, the consumer associations have observed that
households lack liquidity and use credit to meet their basic needs while increasing their personal
indebtedness. However, one of the most significant characteristics of the offers that were studied is the
easy access to credit products. Consumers have a tendency to gain themselves to the quickest and
easiest ways of getting what they desire. As a consequence, promotional strategies tend to use
techniques that render purchasing goods and services as easy as possible.
Zafar U. Ahmed & et al. (2007) stated that customer define their lifestyle in different ways according to
their level of income. As we know, different level of income will consume different things by using
different ways. For high level income or the rich people, they will spend their money for not only
necessity things but for their pleasure. Difference with low level of income people as their spending
focused more on necessity things.
The increasing number of the credit card holder has brought excessive spending by consumers with a
lot of side effects. Many Malaysia customers seem to show excessive buying behavior, commonly
known as compulsive buying. Easy availability of credit and compulsive buying has resulted in many
adverse effects such as addiction to excessive spending and debt. Increasing concern the number of
credit card holders seeking bankruptcy proceedings for many years was also reported.
The relationship between credit card use and uncontrollable buying behavior seems to be one reason
in considering about the rapid increase both by credit card and obsessive buying in the last few years
(Hye-Jung Park, Leslie Davis Burns, 2005). This strengthened that lifestyle is one of the factor that
contributing to the credit card bankruptcy.
2.3 Conceptual framework
Independent Variables Dependent Variable
Knowledge about credit card and bankruptcy
Bankruptcy Due to Credit Card Debts among Young Executives
Financial management
Lifestyles
Table 1.3 Relationship between independent variables and dependent variable
Based on the conceptual framework above, independent variable (IV) refers to the factors that
contribute to credit card bankruptcy while the dependent variable (DV) referring to credit card
bankruptcy.
2.4 Hypothesis
A hypothesis can be define as a logically conjecture relationship between two or more variables
expressed in the form of a testable statement. Relationships are conjectured on the basis of the
network of association established in the theoretical framework. In this research, there were several
hypotheses that can be made such as:
H1. There is significant relationship between knowledge about credit card and bankruptcy and
bankruptcy due to credit card debts among young executives.
H2. There is significant relationship between financial management and bankruptcy due to credit card
debts among young executives.
H3. There is significant relationship between lifestyles and bankruptcy due to credit card debts among
young executives.
Share This Essay
To share this essay on Reddit, Facebook, Twitter, or Google+ just click on the buttons below:
Request Removal
If you are the original writer of this essay and no longer wish to have the essay published on the UK
Essays website then please click on the link below to request removal:
Request the removal of this essay.
More from UK Essays