Strike A Balance In The Spending Season

Sun Herald

Sunday December 7, 2003

DAVID KOCH, David Koch is Channel Seven finance editor and hosts Sky Business Report on Sky News channel.

Give yourself some credit and check you are not lining the bank's coffers this Christmas by bad payment practices with the plastic.

JUST over two weeks to Christmas and the annual shopping frenzy is well under way.

But today the tinkling of the cash register has been replaced by the swipe of the credit card, followed by the beeps of the PIN.

Australians have a record amount chalked up on their credit cards. While that's a scary proposition on the surface, one of the main drivers of this is that we now use cards as a transaction account rather than just a tool to access credit. In fact, as a general rule, we are still pretty good at paying off our balances.

But using a credit card as a convenient transaction tool comes with its own costs which can certainly mount up with heavy use.

At this time of year, with credit so easy to come by, many of us take it for granted not realising that we are often needlessly lining the banks' coffers. To choose the right credit card, the interest rate has to be weighed up with any annual fee and the conditions attached to any interest-free period.

A general rule of thumb is that if you're paying more than 9 to 11 per cent on your credit card, you can do better, and it's worthwhile assessing the options available.

Two cards from the same bank may have entirely different conditions. If, however, you can find your way through the plastic jungle the benefits can mean minimising the cost of using credit while making the most of its convenience.

Depending on how you use a credit card, different types will suit different people.

People generally use credit cards for one of two reasons. They are used purely as a convenient payment mechanism, with the debt usually paid off when the monthly statement arrives. Or they are used as a credit facility to fund purchases, which usually means a continuing outstanding balance.

Do not take any interest-free period at face value. The biggest catch with credit cards is the interest-free period and the way in which interest is calculated when you exceed it.

While offering a 25-day interest-free period, if full payment is not received in that time on some cards, the interest-free period is sacrificed on future purchases. You get no interest-free days if you haven't paid the previous outstanding balance in full.

And when you don't pay the outstanding credit balance in full by the due date, interest can be charged right back to the date of purchase.

Others may levy a credit charge equal to one month's interest.

Other banks charge interest from the date a purchase shows up on the statement and some from the date the statement is issued. Check out the terms and conditions of any credit card account you consider.

The best way to avoid credit charges, whatever they are, is to pay up promptly. This means all outstanding charges on the statement, not just the minimum repayment required on the bottom of the statement. Those who pay just the minimum each month will still incur considerable interest charges.

Other things to remember:

* If you know you will not be able to pay back your debt in the prescribed interest-free period, you would be better off applying for a card without an interest-free period as they normally carry lower interest rates.

* If your card has got out of hand, it could be advantageous to pay off a more expensive card with a cash advance from a card that carries a lower rate.

* Interest-free periods do not apply to cash advances.

* Charge cards are issued by retailers to provide customers with credit to make purchases of their goods or services only. Unlike credit cards they can not be used as long-term sources of credit. Payments ideally have to be made within 30 days of the purchase. Credit on these cards is provided not by the retailer but by a finance company, and interest rates are high.

Target the needy

ANOTHER lift in official interest rates and another barrage of criticism from politicians saying it isn't necessary and is damaging to a range of sectors of the economy.

The Reserve Bank is concerned about the heat in the property market, the consumer spending binge and the high level of personal debt.

Raising interest rates will impact directly on these areas.

But the downside is it also hits small business and farmers and pushes up the Australian dollar, which makes our exports less competitive.

The Reserve Bank is an independent body that only has interest rates at its disposal to tweak the economy.

But governments have a range of fiscal tools they can use to target particular areas. I reckon they have become lazy in getting assistance to those who need it.

Home loan maths

THERE has been a stampede to fix home loans. But those borrowers should think about what they're doing.

The time to fix was at least three months ago. Since then fixed home loan rates have been steadily rising and many are now well above the variable rate.

Our rates are at 5.25 per cent, compared with the US at just 1 per cent.

Most economists believe we will get another rise early in the new year and maybe one more after that; another 0.5 per cent should do us. We are not heading for 17 per cent mortgages again.

So do the maths on your own circumstances, because a knee-jerk reaction could prove expensive.