Cards With A Catch

Sydney Morning Herald

Wednesday January 4, 1995

VITA PALESTRANT

THERE are bargains galore at the January sales - but it is also the time when most of us are reeling from our pre-Christmas shopping spree and wondering how on earth we will make ends meet. It is during just such emergencies that a store credit card can be handy.

Being short of cash at sale time might mean you miss out on significant savings, and a store card can be especially useful. These days most major retailers offer in-house cards with interest rates ranging from 18.95 per cent to 21 per cent and interest-free periods of between 55 to 60 days. This compares with rates of about 15 to 17 per cent for most general credit cards.

Store cards are relatively easy to qualify for and the service is free - a bonus when regular credit cards cost in the vicinity of $25 a year. But it is also a good way for retailers to net more customers, to tie them in and to boost sales, which may account for why there are more than 600 types of store cards available.

Most store cards are operated by independent credit providers or finance companies, although some big retailers, such as David Jones, operate their own credit facility.

Customers like the cards for several reasons. They are convenient, they save you from carrying large sums of cash around, and they provide a useful means of juggling the household budget when money is tight.

In addition, card-holders are often offered special benefits such as discounts, special offers, invitations to in-store events, advance notice of sales and special promotions, and phone-order services.

These benefits are all tangible and attractive. But there are also pitfalls in using this type of credit facility which are not always obvious, even to sophisticated consumers.

Often what is intended only as a tool for budgeting can quickly become financially oppressive. There are two reasons for this.

First, interest rates are substantially higher than those of ordinary credit cards (by up to 10 percentage points), and second, because of the way interest is calculated.

Information about the latter is frequently buried in the terms and conditions of the card contract, which is normally sent to the customers after they have applied for and been granted a card. Use of the card then constitutes an acceptance of the terms.

The terms are by no means easy to read, and store and account staff often give confused explanations about how they work.

The Herald had its own difficulties in this regard. We approached Australian Financial Network for details on their Coles Myer cards, and asked specifically how interest was calculated when an account was only partly paid.

Mr George Beatty, the company's client service manager, said he could not give details and that "not even a bank gives that sort of information". (Banks do.) Household Financial Services, which operates the Freedom Furniture card, asked whether the article would be "negative or positive" and wanted the questions in writing before replying.

Why the reluctance to make basic information available? It's an issue financial counsellors say they battle with all the time.

Ms Betty Weule, manager of Credit Line, the largest financial counselling service in Australia, sees no problem with most store cards as long as payment is made by the due date.

It's when part of the debt is rolled over that difficulties can ensue, she says, adding that most consumers have no idea how the credit on their account is calculated or how the debt accumulates.

"You can forget interest-free days if you don't pay your account in full. Unless the whole amount is paid by the due date, interest is charged on everything backdated to the date of purchase, and keeps on accumulating," she says.

"Most people only discover this when their statement arrives. And that's if they can understand it - many of them are so complicated." That's where it becomes vitally important for consumers to check on the details of their particular card and ensure they are clear on how it works.

But most people are unlikely to be circumspect when they are shopping and enjoying themselves. The bait with some cards, Ms Weule says, is the offer to pay off a purchase over six months, interest-free.

"It nets a lot of customers, especially on expensive items. What people don't realise is unless they pay the purchase off in full within that time, they will be charged interest on the whole amount." They are quite pleased because they are convinced the interest on the remaining $1,000 won't be that bad even though they are aware the interest rate will be high.

"But it doesn't work that way," says Ms Weule. "Interest is backdated on the entire amount to the date of the purchase.

"And if, in the meantime, you have also bought curtains, interest will be charged on that, too. There is no interest-free period if you are carrying a balance." At this point, she says, consumers become confused and want to know more about the terms and conditions they have agreed to.

"But all they can remember is signing up in the store in a flurry and getting the card in the mail some time later. They can't understand why they are not getting the interest-free period and why interest is being calculated on everything including the amounts they have paid." One particular youth-oriented clothing chain, she recounts, was in the habit of handing out cards to teenage girls as they left the school gate.

"It was a nightmare. Eventually the Government had to step in and say 'cut this out or we will legislate'." It's not unusual for the agency to have cases where cards have been issued to the intellectually disabled and people suffering from senility, she says.

But she concedes it's unfair to tar all operators with the same brush and readily acknowledges store cards are useful if used correctly.

"If you know what you are doing and what you are getting into, that's fine. But my advice is, once you have a store card, keep it for emergencies only, otherwise it's surprising how quickly spending creeps up and becomes routine." Impulse buying should be avoided at all costs, she says.

"We have a motto, 'Think twice or pay twice - credit costs you'. A small debt can easily blow out with this type of credit and once it gets into the legal process, it rises rapidly and before you know it a debt of $1,800 has blown up to $30,000." If they won't let you do that, it's suspect.

"Ask yourself whether a low interest credit card that can be used everywhere wouldn't be a better option," she says.

There is another variation of the store credit card or credit card facility that consumers have to watch out for. Mr Simon Cleary, a solicitor with Redfern Legal Centre, says that since the traditional distinction between personal loans and credit card facilities has become blurred over recent years, some unscrupulous finance operators have used it to their advantage to sidestep consumer legislation and mislead customers.

"The real problem is when someone goes into a shop for a big-ticket item and is offered credit. The store implies they are getting credit for that particular item and that it is a personal loan - but what they are in fact getting is a credit card facility." These arrangements are typically offered through retailers of white goods, electronic goods and second-hand cars, with interest rates as high as 26 per cent.

"There is a big difference between a personal loan and a credit card facility. The outcome is very different for the borrower. With a personal loan the interest is fixed and the term is fixed - you know exactly what your monthly repayments will be and how much you will pay in interest. If there is a commission, it has to be disclosed," he says.

But with a credit card facility there is no certainty. The interest rate can change overnight, and if there is a commission the finance company is not obliged to disclose it.

"The contract is set out like a personal loan and the credit limit happens to coincide with the purchase price, but the bottom line is the customer is being misled and has no idea how much the loan is going to cost them." Under existing legislation the finance company is not obliged to send customers the credit card - which suits the company as the consumers are less likely to be alerted to the fact that they have been misled.

Mr Cleary strongly believes better disclosure is necessary to protect consumers from such practices.

"Sales staff often don't know they are obliged to explain the terms and conditions of the contract. Many of them do not fully understand the contracts themselves and often give customers confusing answers," he says.

He cautions consumers to be careful about signing anything in a store. "Check to see what you are getting into, and how the credit arrangement works. Ask whether it is a personal loan or a credit card arrangement.

"In terms of the legislation, you are entitled to a copy of the contract outlining the terms and conditions. Take it away with you and make sure you understand its contents." around for finance at the major financial institutions, where the terms and conditions are communicated in a straightforward way.

"Ask yourself what benefit there is from getting credit from a store. If you want a personal loan, shop around at a credit union or bank and there won't be any hidden commissions.

"Or if you want a credit card arrangement, find out what's available on Bankcard, Mastercard or Visa - you will save a lot on interest."

HOW THE INTEREST CHARGES COMPARE
Store       Card operator            %   Free days
Grace Bros  Aust Financial Network 18.95 Up to 60
Target      Aust Financial Network 18.95 Up to 55
Katies      Aust Financial Network 18.95 Up to 60
David Jones David Jones            21.00 Up to 55
Sussan      C'wlth Bankcard Serv.  20.20 Up to 55
Freedom F   Household Fin Services 21.00 Up to 60

© 1995 Sydney Morning Herald

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