The high cost of free credit

BACK in the 90s, when I first started working, certain financial institutions introduced “lower end” credit cards for Malaysians who had just entered the job market.

The limits on these credit cards would vary depending on your salary, and the one I chose had a RM5,000 credit limit. There were also cards that offered a RM3,000 credit limit. These are really small numbers, but to many salaried employees who earned below RM1,000 a month, the credit cards were a boon.

Predictably, the influx of these cards on the market created a surge in personal debt. Many young people spent beyond their means, and these resulted in them being mired in debt.

Bank Negara had to step in and tighten the rules for credit card applications. Cards could no longer be given to all and sundry. Restrictions on your credit history and income applied. And these application criteria remain to this day.

But I see the same scenario being repeated now, but not with credit cards. The “Buy Now, Pay Later” (BNPL) boom has reached alarming levels in Malaysia. BNPL balance rose to RM5.3bil in 1Q 2026. And the market is expected to grow even more thanks to the expansion of Malaysia’s e-commerce platforms.

With limited credit card penetration and consumers looking to avoid interest-based loans, BNPL has emerged as an attractive option for Millennials and Gen Z. Its zero-interest instalment plans align with the financial needs of these demographics, bridging the gap left by traditional credit products.

In terms of total household debt, RM5.3 billion is just a fraction of the RM1.63 trillion total (or 85% of GDP), which still ranks us among the highest in South-East Asia. BNPL was only about 0.3% of household debt at the end of 2025.

The government may not think that the situation is an immediate risk. But a closer look at this 0.3% will show that BNPL users are not a random slice of the middle class. About 40% of BNPL use is by people aged 30 and below. More than 70% of active users are from the B40 group, typically earning under RM5,000 a month.

A typical BNPL purchase is under RM100. You can even buy a RM20 tray of eggs and convert this into a three-month instalment. This practice encourages the B40 and the youth in general to continue to use this method of payment. The danger is that the extended credit becomes hidden debt.

Used for discretionary purchase, like an electrical appliance or a pair of shoes, BNPL can function as a compensatory credit layer when wages lag prices. Living costs continue to rise, and an interest-free instalment can be cheaper than a credit card and less humiliating than a pawnshop.

Some users previously had no formal credit at all. For them, BNPL is a godsend.

Used for essentials, the same product becomes something else. Small tickets accumulate because they feel invisible. Eight million accounts do not need large individual balances to create a quiet credit crunch among the young and the poorly paid.

The long-term risk is not only arrears. It is a habit. A generation that learns to treat groceries as instalments learns a distorted price of money.

When those same borrowers later apply for a car loan or a first home, the instalments they treated as frictionless will sit on a file. Credit bureaus are increasingly in the picture. A missed BNPL payment is no longer a private quarrel with an app.

To be fair, the government has acted belatedly. The Consumer Credit Act 2025 came into force from 1 March 2026. The act, via a Consumer Credit Commission, looks at non-bank credit such as BNPL. Existing providers have until Nov 30 to apply, after which operating without a licence is illegal.

Providers must assess creditworthiness and affordability, especially once limits rise above about RM1,000. They must not raise a facility for a consumer who is likely to struggle. The Commission is also studying whether to cap interest – a decision it says will follow data on usage, arrears and access to credit.

None of this should be read as a call to abolish BNPL.

Killing a compensatory credit layer while prices stay high would push some households back toward informal lenders.

BNPL is useful when it finances what the borrower can repay. It is dangerous when it finances needs that the borrower cannot.

Youth and B40 users are not “irresponsible”. They are the groups for whom a RM90 shortfall is most likely to be real.

The test of the new law will not be how many licences are issued by November. It will be whether the next cohort of 25-year-olds will still split groceries because the cupboard is empty – and whether anyone with a licence is still allowed to let them.

If you are managing your own finances right now, remember the golden rule of liquidity: if you cannot afford to buy it twice in cash, do not let an app convince you to break it into four “interest-free” payments.