Overdraft Blues

Sydney Morning Herald

Wednesday October 6, 1999

Vita Palestrant

Credit facilities may have eclipsed the overdraft, but there's life in the old dog yet.

Has the personal overdraft reached its use-by date? Credit cards and flexible mortgages are overtaking it in popularity. Although the overdraft may not be the best solution for everyone, this dowdy old trouper still has a lot of life left.

Decades ago, the personal overdraft was a highly sought-after facility as much for its line of credit as for the status it bestowed on the valued customer. But these days, with credit flowing freely, you can tap into several alternative sources of credit which, depending on your needs, can be cheaper and more convenient.

As the table shows, the cheapest source of finance is offered by a mortgage-backed revolving line of credit with chequebook access, which can be as low as 6.45 per cent, or half the cost of the other options.

But even if you don't have this facility, a redraw facility or 100 per cent offset account can do the trick when you're in a tight spot. After that, it's a toss-up as to whether a credit card is cheaper to use than a personal overdraft. Sometimes plastic offers a lower rate and sometimes the overdraft is a winner - much of it depends on the institution you choose.

The important thing to note is that plastic is cheaper to operate. There are mostly no annual fees on cards with no interest-free days, while overdrafts involve an establishment fee, stamp duty and ongoing fees.

This means that, apart from the interest cost, you can count on paying about $250 for the establishment fee on the overdraft and $70 to $90 in annual service fees.

A personal loan is somewhat different to the other options we've mentioned in that it is not a revolving line of credit. You have to pay it back within a fixed period, which may be set at one to five years. This form of credit carries upfront fees of up to $100 with interest rates that hover around 9 to 10 per cent - slightly lower than credit cards or overdrafts.

Catherine Cowie, the head of personal consumer markets at Westpac, says there were fewer options for credit decades ago but now there is an expanding range of more "sexy" opportunities, such as credit cards with reward points, personal loans, redraw and equity access loans.

"The overdraft has been around as long as Westpac has, for 182 years, and it hasn't changed much, whereas other options have been more evolutionary. But it still plays an integral role in banking," she says.

"It's a complementary form of credit; it plays a slightly different role to the others. You can access it as though the funds were your own via cheque, ATM and EFTPOS. It acts seamlessly and a lot of customers like that sort of 'come and go' facility. It's still of value."

Cowie says there is a progressive use of overdraft facilities by people who are smart money managers and who use it as one of many tools in a suite of financial products.

"It fulfils cash-flow needs and it's there to take advantage of opportunities as they come your way. It's a quickly activated tool, but it isn't the right solution for everyone.

"A lot of people elect to have it there as an insurance policy. They will have a $10,000 line of credit and only use a fraction of it, it's that flexible. It does come down to personal circumstances."

Cassandra Williams, the manager of research services at Cannex, says there's no doubt that other highly competitive lines of credit are having an impact.

Many home loan borrowers, she says, get an automatic cheque protection facility, albeit for relatively small amounts. This means the institution will honour your cheque when you have insufficient funds and save you the embarrassment and hassle of a bounced cheque.

Facilities such as these have further eroded demand for the overdraft, she says.

"The overdraft is no longer as popular as it used to be although it still has a place in business. Banks would rather steer you into a credit card, revolving line of credit or amortising product, such as a personal loan, where you pay back the debt over time."

Credit cards, in particular, are popular because they have the advantage of being accepted everywhere - not always the case with cheques, she says. "There is no paperwork, no establishment fees, stamp duty or ongoing fees. It is cheaper and more simple to use."

Haydn Park, a spokesman for the National Australia Bank, maintains overdrafts are more of a business tool and for consumers they are something of a dinosaur. "Business has a greater need for overdrafts because its cash-flow fluctuates and it has greater liquidity requirements. It needs it so it can take advantage of a quick deal. For consumers the personal overdraft has been dead for about 20 years."

Mortgage innovations such as home equity loans, redraw and mortgage offset offer consumers greater flexibility. "If you use a mortgage offset account, the money is at call, simple and convenient to use. There's no fee and no paperwork," he says.

And, of course, it's your own money so there is no interest bill. All of this presupposes that the consumer has a home loan that is well ahead of its repayment schedule.

But what if the consumer wants to, or has to, use the institution's funds in an emergency?

Alex Sala, the head of Endeavour Credit Union, says the other options aren't an adequate substitute. "If you are operating a chequebook and debit cards, the purpose of the overdraft is to give you a buffer, that if you sign a cheque it is not going to bounce, that you have access to cash.

"A credit card can't do that for you unless you do a cash advance and deposit the money in your account, which is not a very efficient way of doing things. There is still a need for the product although it is less and less the case."

He says the banks tend to regard the product in a "pretty negative" light because once approved, it's difficult and awkward to get rid of.

"What we do is contain it with pretty small amounts, typically $1,000 to $3,000. It's designed to help members when there is a mismatch of funds - a timing problem where your cheque is presented while your pay is coming through.

A credit card, personal loan or redraw is no substitute for that."

Sala says the credit union, like many other institution, offers members an automatic overdraft facility with their home loan product called "rejection protection". This underlines the importance of establishing exactly what happens if you don't have overdraft protection. Generally speaking you can expect to be hit with a raft of pretty hefty fees if your account has insufficient funds to meet cheques or direct debits.

It will include a reference fee of about $20 or more, as well as a penalty interest rate. The latter varies according to your credit worthiness.

Find out how the reference fee is applied as it varies from institution to institution. You may be slugged per item, that is, for each overdrawn cheque or direct debit, or per day. Or the institution may decide to let the cheque bounce in which case you are hit with a dishonour fee of about $25, a penalty interest rate and a red face. If the cheque is presented again and there are still no funds to meet it, you get another $25 slug.

To avoid one heap of fees being piled on another, plus a good deal of embarrassment and hassle, Williams suggests you start with your home loan and find out whether it includes a cheque protection facility. But be aware that it's likely to be for a modest amount - $1,000 to $2,000.

She also recommends that you make sure it is attached to the account you transact on. Otherwise ask for a sweep facility which gives your institution the authority to take funds out of your other accounts to meet the payment.

Cheque list

* Do you have a cheque protection facility?

* How does it work and what are the costs?

* What happens if you don't have this safety net - what are the costs and consequences?

DEFINITION

Mortgage Offset: Reduces your mortgage instead of paying interest on money deposited.

Redraw facility: Allows you to get back extra money paid off your loan.

Revolving line of credit: Ongoing access to a set amount of loan funds.

OVERDRAFT BLUES
 COMPANY                                        UNSECURED             UNSECURED
         1ST MORT SEC
                                                          CREDIT CARDS
OVERDRAFT          REVOLVING LINE

                                           OF CREDIT
 ANZ                                                    11.00%
 11.80%                    6.55%
 CITY COAST CU (NSW)                      15.00%                   15.00%
            8.75%
 COLONIAL STATE BANK                    13.95%                   13.75%
          6.65%
 COMMONWEALTH BANK                    13.95%                   11.55%
        6.55%
 ENDEAVOUR CREDIT UNION               11.75%                   15.00%
        6.45%
 NATIONAL AUSTRALIA BANK            14.85%                   13.00%
      6.55%
 NSW TEACHERS CU                            11.50%                   11.50%
              NA
 SGE CU                                                11.50%
13.90%                   7.75%
 ST GEORGE BANK                               14.00%                   13.00%
               6.55%
 WESTPAC                                             13.95%
11.5%                    6.65
 SOURCE: CANNEX

© 1999 Sydney Morning Herald

Back to News Index | Back to Home