Card Tricks

Sydney Morning Herald

Wednesday September 13, 2000

John Collett

The high charges on credit cards should encourage all users to match the right card with their spending pattern. John Collett reports.

Credit cards provide an easy way to borrow money but the fantastic plastic's greatest strength is also its Achilles heel. If they are not careful, consumers can find themselves on the slippery slope of spiralling and expensive debt.

At 14 to 17 per cent, credit card interest rates are hefty compared with mortgage rates at about 7.5 per cent and extortionate compared with official rates of 6.25 per cent.

Lenders say high interest rates on credit cards reflect the fact that credit card debt is unsecured - lenders don't have the customer's house as security - therefore lenders carry more risk. At the present high levels, credit card customers have to question whether they are using their cards wisely and whether they have the best card for their usage. As interest rates are so high, not paying off credit card debt in full each month will be costly.

Not so for the disciplined credit card consumer. While they accumulate hundreds of dollars each month in debt, they pay little or no interest charges because they pay the outstanding balance before the end of the interest-free period.

Unfortunately, it is the case that those struggling to clear their card debts are subsidising the disciplined users through the high interest rates they pay to the lender. And to make matters worse for credit card junkies, lenders are adding on charges, even for those who pay off their debt on time.

First, annual fees of between $20 and $30 have been slapped onto more and more cards. Second, a late payment fee of, typically, $20 has been introduced if the minimum payment is not made by the due date.

Tony McCoy, an analyst with Market Faxts, says the best way to use the convenience of easy credit is to match your spending habits with the right type of card.

Able to pay off your debt in full by the due date? Then pick a card with an interest-free period. The interest rate is 1 to 2 per cent higher than those cards without interest-free periods, but for those who can clear the debt quickly, there is no interest to pay.

Most of the cards offering interest-free periods give 25 days' grace, taken usually from the date the statement is issued. This means almost two months of interest-free days if the debt is incurred at the most opportune time, that is, immediately after the last statement is received.

But not all lenders count the interest-free period from the same starting point, says McCoy. While most charge from the date the purchase shows up on the statement, others charge from the date of purchase. The earlier interest accrues on your credit purchases, the higher the effective interest rate.

Another hidden cost that adds to your debt woes is that some lenders cancel the interest-free period if previous purchases have not been paid in full by their due date. For example, if full payment for one month's purchases is not received by the due date on a ANZ credit card statement, the interest-free period will not apply and interest charges will then be backdated to the date you purchased the goods or services. Subsequent purchases will not enjoy an interest-free period until the outstanding balance is paid.

Strategies

Once you have matched up your spending and savings pattern with those credit cards that best meet your needs, be prepared to shop around and examine the options.

With so many payments able to be made by credit card, from the weekly groceries to the quarterly gas bill, disciplined users can spend hundreds of dollars a week using their card yet incur little or no interest charges by paying the card's debt off before the due date. And there is often the extra incentive of accruing reward points.

McCoy says that for disciplined users the best strategy is to "run your life through them" and clock up as many reward points as possible. Loyalty programs were initially attached only to lenders' higher premium cards (offered to those on higher incomes) such as gold cards, but now rewards points can be earned on more and more cards.

McCoy says for disciplined users a card with an interest-free period, a higher interest rate and no up-front fees is the most suitable. The table shows that Aussie Home Loans's Aussie Card has the lowest interest rate, 13.85 per cent, while for the four major banks (Commonwealth, ANZ, Westpac, NAB), card interest rates are between 16.5 and 16.75 per cent.

If you are a disciplined user, who always pays off debt on time, interest rates are not as important as other features of a card. For example, ANZ has the shortest maximum interest-free period - 44 days - compared with 55 days for the others listed in the table. Also, CBA has the lowest annual fee, $22, and St George the highest, $30.

Among the cards deemed suitable by Market Faxts for disciplined users, only the AMP Credit Card, the CBA Visa card and Aussie Home Loans's Aussie Card have loyalty programs. At the other end of the borrowing spectrum are consumers who use a credit card to buy things they don't have the money for at the time or simply can't afford. These users are dubbed "line of credit" users by Market Faxts because their credit card debt is continuous - they never pay off the card in full.

Michael Funston, co-ordinator at the Consumer Credit Legal Centre, says most people who have trouble paying off their cards have the wrong type of card. "They have the cards with interest-free periods and higher interest rates - the same type that the rest of us have."

Use of a credit card in this way is another form of personal loan. Such card holders are best advised not to buy on credit or to consider other cheaper options, such as a personal loan. Funston says their best option in credit cards will be one with a fee in return for a lower interest rate. These cards have no interest-free period after purchases.

For example, ANZ's Low Interest MasterCard has no interest-free period and an interest rate of 13.5 per cent, while the bank's Free Days Visa card has an interest-free period of up to 44 days and an interest rate of 16.5 per cent. Both cards have a $25 annual fee.

Line of credit users would be better off with the ANZ card which charges the lower interest rate but has a $25 annual fee. This fee may be worth paying when it is compared with a card such as the Westpac No Annual Fee MasterCard, which has an interest rate of 15.2 per cent. The AMP Credit Card and Aussie Home Loans' Aussie Card are included in the table as suitable for line of credit users (even though they have interest-free periods) because they both have lower interest rates than other cards with interest-free periods.

Line of credit users who make cash advances should be aware that they incur interest charges from the day of the advance, even if the consumer has a card with interest-free days. The following is a simple example how a consumer can get caught out by a cash advance.

Cash advances incur interest from the day of the advance, even if the card offers interest-free days. Here is how the cash advance trap works. Suppose you have a debt of $200 and this debt is still within the interest-free period. Let us say you take a cash advance of $40, which is repaid the next day. The banks will use the $40 to repay part of the $200 debt, not the cash advance. This leaves a debt of $160, which is still within the interest-free period. You will continue to pay interest on the $40 until the whole debt (that is, the $160) is cleared. In other words, just don't think that by repaying the cash advance you are back to where you started, with a $200 debt not incurring interest charges.

Some people only want to have a credit card on hand for use in emergencies. On the rare occasions when they are stuck without cash, the plastic can come to the rescue. For emergency use, the most suitable card will be one without an annual fee, no interest-free days and a lower interest rate. A card with no annual fee will be important if a whole year goes by without needing to use the card.

As can be seen from the table, the two cards with the lowest interest rates are Westpac's No Annual Fee MasterCard (no interest-free days and no annual fee), which has an interest rate of 15.2 per cent, and CBA's Visa Card (no interest-free days and no annual fee), which has an interest rate of 14.75 per cent.

McCoy says many people don't realise how easy it is to switch cards. Many consumers wrongly assume that because they have outstanding debt on one card, they are not able to change to another card without paying out the debt on their original card. As most major lenders offer both types of card, consumers have no need to change lenders. Knowing that cards can be easily swapped should encourage those struggling

with credit card debt to switch to a card with a lower interest rate and no interest-free days.

Being aware of the options available and armed with a better understanding of how they work may not allow consumers to slay the credit card debt monster, but at least they can better control it.

ACCC takes action over card fees

Credit card interest rates and fees could fall if the Australian Competition and Consumer Commission (ACCC) succeeds in its action against the National Australia Bank (NAB) over credit card interchange fees. These are fees charged between banks on credit card transactions. The consumer watchdog has accused NAB of colluding with the major banks to fix its interchange fees.

The ACCC has issued a statement of claim against NAB in the Federal Court and is holding discussions with other banks on the matter. The move will make it harder for the banks to defend the level of fees they charge merchants each time a customer pays by credit card. It will also force them to be more open about how they calculate card fees and the interest they charge on credit card debt.

The financial services policy officer at the Australian Consumers' Association (ACA), Louise Petschler, says the ACCC action should, at the very least, lead to greater transparency in the issue of how the interchange fees are set. "We will get a better look at how these charges are being handed on to consumers through credit card fees," she says.

The ACA says that for too long banks have been able to set fees and charges outside accountable and transparent processes. "Consumers want and deserve answers," it says.

Cards on the table
 Institutions   Type of card    Interest Rate   Number  Annual Fee      Late
Payment Fee     Disciplined     Line of Emergency       Reward Program
                        of free days                    User    Credit User
User

 AMP    AMP Credit card 7.95% pa introductory   Up to 55 days   No annual card
fee     $20 late payment fee
                interest for first six months           in the first year. $25
annual  charged if minimum payment      4       4       6       Yes
                then reverts to AMP Credit              fee thereafter  not made
 by due date
                Card rate, currently 14.85% pa

                                        A fee of $20 will be charged to your

                                        credit card if the "Minimum Payment
4       6       6       No
 ANZ    ANZ Free Days Visa      16.50%  Up to 44 days   $25     Required this
Statement" shown on
                                        the statement of account is not paid
within
                                        28 days of the statement date


        ANZ Low-interest        13.50%  Nil     $25             6       4
6       No
        MasterCard




 AUSSIE         Aussie Card     8.95% for the first six months  Up to 55 days
No annual card  $10 late payment fee charged if minimum         4       4
6       Yes. Participate in the
 HOME           and then reverts to the                 fee in the first year.
payment not made by due date.                           American Express
 LOAN           Aussie Card rate,               $25 annual fee
                Membership Rewards
                currently 13.85% pa             thereafter
                Program for $20 pa


 CBA    CBA Visa Card   16.65%  Up to 55 days   $22     $20 late payment fee is
charged if
                                        payment has not been received   4
6       6       Yes. Eligible to
                                        by the 35th day
participate in
                                                                        True
Awards Programs

        CBA Visa Card   14.75%  Nil     $0
        (no annual fee and no                                   6       4
4       No
        interest-free days)


 NAB    National Visa Classic   16.75%  Up to 55 days   $24     $20 late payment
 fee charged if at any
                                         time any amount due and payable is
4       6       6       No
        Bankcard fee free       15.85%  Nil     $0      30 days or more overdue
and the unpaid
                                        balance of the account is more than $100
        6       4       4       No


 ST GEORGE      St George       16.25%  Up to 55 days   $30     $20 late payment
 fee is charged if
        Interest-free Visa                              minimum payment is not
made by the due         4       6       6       No
                                        date, and unpaid balance of the
                                        account is more than $100

        St George Visa  15.25%  NIl     $0
        No annual fee                                   6       4       4
No




 WESTPAC        55 Day Visa     16.65%  Up to 55 days   $24     Missed payment
of $20 applies if two or more
        & MasterCard                            consecutive minimum payments are
 missed.        4       6       6       No
                                        Fee applies only if closing balance
                                        is greater than $100

        No Annual Fee   15.20%  Nil     $0
        MasterCard                                      6       4       4
No

© 2000 Sydney Morning Herald

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