Too Easy Money

Sydney Morning Herald

Wednesday July 24, 2002

Leeanne Bland

A credit card can be a handy tool solong as it doesn't take a hold over you, reports Leeanne Bland

Gone are the days when the credit card was a luxury used mainly to buy big-ticket items. These days a credit card is a basic financial tool and it would be a rare adult who didn't have at least one plastic card.

But depending on how you use it, it can become an expensive tool.

Getting hooked on credit cards is easy: they allow you to use other people's money (the bank's) to juggle your cash flow and allow you to avoid Eftpos transaction fees.

The Reserve Bank of Australia is concerned this has created a skew towards credit cards and is looking at ways of restructuring the payment system to address the imbalance.

RBA reforms are expected to make Eftpos more attractive to use than credit cards. The changes are to be announced next month and are expected to be phased in over five years. Till then, the challenge for consumers is to use their credit cards wisely without incurring more debt and bigger interest payments.

Lisa Montgomery, from research house InfoChoice (www.infochoice.com.au), says the latest figures show, on average, consumers have more than $2000 in credit card debt. And many people would have much more.

To help you use your credit card more cost effectively, we have compiled a list of the common mistakes people make when using credit.

First repayments. Andrew Willink, managing director of financial services research group Cannex, says: ``If you have a card with interest-free days and do not pay the debt in full, the interest may be backdated to the original purchase date and therefore you have lost all interest-free days. This may occur even if you make a partial repayment.

``If the entire debt is not paid off your interest-free-days-card in full, then all subsequent interest-free days are lost until that debt has been repaid for a full statement cycle." It is also a mistake not to make the minimum credit card payment on time.

Willink says: ``If you do not make the minimum repayment on your credit card until after you receive your next statement, you may be charged a fee of up to $20. This would be applicable if you simply forgot to pay one month's account.

``One way to avoid missing that payment is to set up an automatic transfer to pay the account."

But if you do set up an automatic transfer, make sure you have the funds available to make the payment. ``If a payment is dishonoured this can cost up to $12 for a dishonour fee," says Willink.

Although it can be flattering, think twice about signing the letter that offers to increase you credit card spending limit.

Montgomery says: ``The banks make more money from having 10 people with a $10,000 credit card debt at 18 per cent then they do with one person with a $100,000 mortgage at 6 per cent," she says. ``It can be a big mistake to sign the letter. It can end up getting you into further trouble."And one of the costliest mistakes people can make is to use their credit card in conjunction with their home loan.

``Line-of-credit accounts are often hailed as being the saviour of home loans but they are really only any good for about two out of 12 people," Montgomery says.

``You don't really know how much you are spending and you can easily spend more than your disposable income."

Using the card for frequent cash advances is another expensive no-no. ``The banks now charge extra fees, on top of the interest, for doing this," she says. ``Westpac has a huge fee. It is a $2.50 minimum or 1.5 per cent of the cash advance. This means a $500 cash advance will cost you $7.50.

``Think before you do that. It should be a warning sign that your debt is out of control if you have to use your card to supplement your income."

If you have a large balance on your card, the advice often given is to consolidate it into a personal loan at a lower interest rate.

Another alternative is to take a look at the cards that offer cheap, introductory interest rates for people who take out a new card and transfer the balance from another provider (see table, bottom).

There are also credit cards that have a cheap interest rate all the time. ``If you are interested in lowering costs, look at getting out of the ANZ Telstra Visa card and into the BankWest, St George or Woolworths Ezy Banking options," Montgomery says.

Pick a card

How do you choose the best credit card for your needs?

``There are cards with rewards programs that have high interest rates, interest-free days and all the bells and whistles," Lisa Montgomery, from InfoChoice, says.

``These are best for consumers who are paying off the card every month. For these people the interest rate doesn't matter."

She says other people with ongoing balances, really should be in one of the lower interest rate cards.

When it comes to lower interest rate cards, Andrew Willink, from researcher Cannex, says: ``The most important considerations are the interest rate, the annual and ongoing charges and then the number of interest-free days."

It is a good idea to re-evaluate your credit card needs periodically. ``If you have an interest-free-days card and regularly do not meet repayments in full, then perhaps it is time to change cards," he says. Montgomery warns cardholders not to get carried away by cards that offer rewards.

``In a lot of instances they are of no value whatsoever."

But if you are determined to hold a card offering rewards points, at least know what you are getting into, says Willink. ``Select a credit card that has a reward structure that fits into your shopping patterns. Know what your reward programs offers and how to maximise the benefits."

Bypass the buck

Interest rates dropped last year but the big banks did not pass on the full extent of the decrease, says Lisa Montgomery, from InfoChoice (see table, below).

They claimed the costs involved in issuing credit cards such as fraud protection and loyalty reward programs mean the interest rates were not related to the cash rate. But this argument that credit cards costs are not related to the cash rate has not stopped them from passing on the full effect of the two recent rate rises we have seen.

``On average the banks reduced their credit card rates by just over 1 per cent over the course of last year," Montgomery says.

``With the last two interest rate rises all the big banks have snuck them through."