All Care, No Responsibility

Sydney Morning Herald

Saturday February 26, 2000

Annette Sampson Personal Finance Editor

It's like stealing candy from a baby - only much easier. If bank bashing has become a national sport, the banks have only themselves to blame.

Take their latest effort. After years of arguing that official interest-rate movements had nothing to do with the rates charged on credit cards, they've fallen over themselves to pass on this month's rate hike. And not just the half a percentage point announced by the Reserve Bank, either. As this newspaper reported earlier in the week, the rises have been as high as three-quarters of a percentage point.

The argument that rates have to be high because default rates on payments are high is equally laughable. Who exactly has been foisting cards and higher credit limits on consumers in recent years? Not to mention urging them to spend, spend, spend like drunken sailors to earn the exorbitant levels of reward points needed for a toaster or flight to Melbourne (always assuming there are seats available when you want to redeem your points). All care and no responsibility.

If you're still not feeling cynical, consider the fact that more of the pinch is being directed at those cards that have "locked in" reward-hungry consumers. Reward cards have traditionally been more expensive than those without rewards, but the interest rate on ANZ's popular Qantas Telstra Visa card is now 16.95 per cent - compared with its non-reward cards, which charge under 16 per cent. Westpac has tried a different tack. It has reduced the interest-free period on its GM Card and Global Rewards Visa standard credit cards from 55 to 45 days - though of course that is only "to be in line with competitor products".

And who said the banks were a Government-sanctioned oligopoly?

So, what can you do? The obvious answer is that if you have a credit card with up to 55 interest-free days, you should pay your bill in full before the due date each month. That way the whole question of interest becomes hypothetical and you have only rises in annual fees to worry about.

But while about 93 per cent of people have credit cards with interest-free days, the fact that $7.5 billion in debt was "carried over" last November from the previous month suggests an awful lot of people are incurring interest on these cards.

Worse, 80 per cent of cash advances (which don't get the benefit of the interest-free days) are made on the more expensive credit cards.

Put simply, many people are using the "wrong" credit cards and would be better off with a card offering no interest-free days, with no annual fee and a considerably lower

interest rate.

Not convinced these benefits offset the value of the interest-free days?

Let's look at how the interest-free days work. If your card claimed to offer up to 55 days interest free, you'd think you had up to 55 days without being charged interest, surely? Not so. For starters, the interest-free period doesn't apply to cash advances. And you can't elect to pay off your cash advance while leaving your purchases unpaid.

Cannex's director of finance and banking, Cassandra Williams, provides this example. Let's say Sally has spent $100 on her credit card but is still within the interest-free period. She finds herself short of funds and gets a cash advance of $20. The following day, she repays the $20. Her debt will be reduced by $20, but she will pay interest on the $20 cash advance until the entire $120 has been paid.

Don't use cash advances? Even with ordinary purchases, if you don't pay your account in full by the due date, the 55 days starts to look decidedly rubbery. Instead of paying interest only on the amount owing after the due date, the bank can backdate your interest. In the worst case, interest is backdated to the date of purchase (so you get no interest-free days at all).

Let's say Sally has paid off her cash advance and starts the month with a clean slate. She makes a $1,000 purchase on the first day of her statement cycle and stops spending. She gets her statement showing the amount due is $1,000.

But Sally pays one day late. Williams says Sally will pay up to 56 days' interest on the $1,000.

If she had paid just part of her payment - $500 - on the due date, she might still, in the worst-case scenario that occurs with National Australia Bank, pay interest on the full $1,000 up to then.

Williams says the other major banks vary, with some charging interest from the statement date or due date and some only charging interest on the amount outstanding after repayments.

She says that if you carry a balance forward from month to month, or even make late payments on a reasonably regular basis, you should give serious thought to switching to a card with no interest-free days.

To add insult to injury, some of the banks haven't even lifted the rates on these less popular cards. Westpac's No Annual Fee MasterCard, for example, still caries an interest rate of 13.95 per cent (compared with 15.90 per cent for its non-reward cards and 16.15 per cent for its reward cards) and National Australia Bank's no-free days offering has not moved either, according to Cannex.

These cards can carry rates several

percentage points below those on the cards with interest-free days - and because there is no annual fee, you don't need to worry about those rumoured GST-related fee increases.

Of course, the reason many consumers choose the "wrong" card is that the free-days cards, typically, offer the reward points. But even then it may pay to shop around.

The American Express Blue Card, for example, now offered by groups such as Aussie Home Loans and AMP, still carries an interest rate of just 13.95 per cent with the opportunity to waive the $25 annual fee if you spend more than $5,000 a year on the card. Williams says the NRMA card also offers a better deal as does the credit union movement's MyCard and a few other alternative offerings.

Unfortunately, it's hard these days to do without a credit card altogether. But if the banks' behaviour sticks in your craw, there are ways to minimise the damage.

© 2000 Sydney Morning Herald

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