WOW!: Credit Card Debt overtakes Mortgage Debt

from: smh.com.au

Household savings improved in the June quarter, but credit cards overtook mortgages as the main form of debt in a survey of Australian households for the first time in almost four years.

The Melbourne Institute household financial conditions index rose 17.2 per cent to 33.7 in June, up from 28.8 in March.

“Credit card debt overtook mortgage debt as the main form of household debt in June, 36.6 per cent compared to 33.9 per cent,” Melbourne Institute research fellow Dr Edda Claus said in a statement.

“This is the first time since November 2006 that households nominate credit card, and not mortgage debt, as their main form of debt.”

The proportion of respondents nominating saving for a “rainy day” as their prime motivation for saving was 51.5 per cent, roughly unchanged from March, the survey found.

It also showed the proportion of respondents nominating holiday or travel as their motivation for saving was 55.8 per cent, up from 55.0 per cent in March.

The proportion of Australians saving grew marginally.

“About 48.8 per cent of Australian households saved part of their income in June 2010, up from 46.2 per cent in March,” the report said.

The June survey revealed three quarters of Australian households fully own their own home or have a mortgage, falling from 79.8 per cent in March and 78.8 per cent a year ago.

Just over 30.5 per cent of households said they would put new savings into deposit-taking institutions, while bank deposits remained the most popular form of savings.

More than 40 per cent of households said they were debt free, while a third said they held mortgage debt, down almost four per cent since last quarter.

There was virtually no quarterly improvement in the proportion of after-tax income used to repay debt, with almost 60 per cent of households indicating they use less than 10 cents in every dollar.

Meanwhile, people in Queensland were more likely to run into debt than those in other states, while NSW and Victorian residents were more likely to save than their counterparts in other states.

The average standard variable rate for mortgages offered by the big four banks is 7.38 per cent, according to RateCity.com.au, while the average low-rate credit card is 13.24 per cent. The average rate on a standard credit card is 19.6 per cent, the rate group said.

While the survey found credit card debt is the main form of debt for many Australians, the total outstanding mortgage debt remains larger by far. According to Reserve Bank data, mortgage debt totalled about $1.1 trillion in April, while other personal debt, which includes credit cards, tallied only about $141 billion.

Retiree debt is soaring (The Sunday Telegraph (Sydney), 18 Jul 2010, Page 29)

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Retiree debt is soaring
By NICK GARDNER
The Sunday Telegraph (Sydney)
18 Jul 2010

RECORD numbers of retirees are being forced to withdraw the equity in their homes to pay off spiralling debts. Financial counsellors and brokers of reverse mortgages have reported a surge in the number of elderly borrowers refinancing their homes to...read more...

Tech Tags: The Sunday Telegraph (Sydney) newspaper News

It Couldn't Be Done - by Edgar Guest

Somebody said that it couldn't be done,

  But he with a chuckle replied

That "maybe it couldn't," but he would be one

  Who wouldn't say so till he'd tried.

So he buckled right in with the trace of a grin

  On his face.  If he worried he hid it.

He started to sing as he tackled the thing

  That couldn't be done, and he did it.

Somebody scoffed: "Oh, you'll never do that;

  At least no one ever has done it";

But he took off his coat and he took off his hat,

  And the first thing we knew he'd begun it.

With a lift of his chin and a bit of a grin,

  Without any doubting or quiddit,

He started to sing as he tackled the thing

  That couldn't be done, and he did it.

There are thousands to tell you it cannot be done,

  There are thousands to prophesy failure;

There are thousands to point out to you, one by one,

  The dangers that wait to assail you.

But just buckle in with a bit of a grin,

  Just take off your coat and go to it;

Just start to sing as you tackle the thing

  That "cannot be done," and you'll do it.

Kochie's Top 10 Tips for a new financial year

The Business of Credit Cards - Part I

Anyone familiar with online affiliate marketing knows that credit card programs offer some of the more lucrative payouts for signing up new users; with some companies offering $30 for a completed application or $160 for a new signup, it is readily apparent that these companies really value new customers. Next, factor in credit card rewards programs; we as consumers love them, since we’re essentially getting paid to spend money using a card from bank XYZ! With all the money that these institutions are throwing at us, how do these companies stay in the black?

How do credit cards end up being a profitable business for the issuers?

Monetization Strategy #1: Annual Fees

Perhaps the most transparent and obvious monetization strategy is the annual fee. It’s worth noting that not all credit cards have an annual fee associated with using them. Those that are most likely to have such a fee attached to them are charge cards from American Express and those credit cards which are marketed to those with poor or flat-out bad credit. Annual fees can range anywhere from $15 per year to thousands of dollars per year, as is the case with the black card from AMEX. For many cardholders that don’t use their card very frequently, the annual fee more than pays for the total costs attached to maintaining that individual’s account, as there simply isn’t that much to do in order to do so! For the more prodigious users of plastic, the annual fee only covers part of the costs for that consumer’s use of credit, and must be combined with one of the other two monetization strategies to yield profits.

Monetization Strategy #2: Transaction Fees

The “bread and butter” of ethically palatable credit card revenues is found in the transaction fees. Did you know that credit cards make the issuer a little bit of money each time they are used? As consumers, we don’t often see this cost, but merchants are very familiar with it. Essentially whenever you use your credit card to make a purchase, the merchant accepting the card pays a percentage or fixed amount (depending on the processing gateway and other factors) of the sale to the company whose card you are using.  These tiny amounts of money can really add up over time, and is the price which merchants pay to have access to the convenience of accepting credit cards. This is why when you go to smaller service stations you will occasionally see signs that state credit cards aren’t accepted for purchases amounting to $X or less, or that an additional fee is assessed to credit card transactions of $Y or less. If the business doesn’t put such measures in place, they actually stand to lose money from such transactions!

Next time we’re going to take a look at what is often considered the most nefarious monetization strategy; finance charges. We’ll take a look at some specific examples to see how much the credit card company really makes from someone’s financial desperation or irresponsibility.

 

Cutting credit is no easy snip

JOHN KAVANAGH – SMH - June 30, 2010

There is no quick fix to slashing your credit card debt.


With credit card rates of more than 20 per cent becoming commonplace, people who accumulate credit balances on their card accounts are facing very high repayment costs. A consumer who falls into the trap of paying only the minimum monthly repayment could take almost six years to pay off the balance and would end up paying interest of almost the same amount as the principal owed.

Credit card issuers have been moving their interest rates up in significantly steep steps this year.

In April, Citibank increased the purchase rate on its credit card by 0.6 of a percentage point to 15.59 per cent, and a number of issuers, including National Australia Bank, Suncorp, Macquarie, Aussie and Heritage Building Society, put their purchase rates up by 0.5 of a point.

The trend has continued since then. In May, Suncorp put up the purchase rate on Clear Option card by 0.5 of a point, the Woolworths Everyday Money card went up by the same amount and Westpac's 55 Day card went up 0.3 of a point. And in the latest round of changes, American Express increased the purchase rate on seven credit cards by 0.5 of a point to 20.49 per cent.

Infochoice has calculated the time it would take to repay a $10,000 balance on a high-rate card (see table). Using a rate of 20.71 per cent (the average of the five cards with the highest rates in the market) and making a minimum repayment of 2.5 per cent (or $250 a month on the $10,000 balance), the cardholder would take five years and nine months to pay off the balance and would pay total interest of $7126.

If the cardholder pays an extra $100 a month, the time needed to repay the balance would fall to three years and five months and the total interest cost would be $3898.

One of the myths of the credit card market is that only a minority of cardholders carry a balance on their cards from one month to the next. In fact the opposite is true. According to Reserve Bank credit card figures, the ''revolve rate'' on cards is 72.5 per cent. Revolve rate is the finance industry term for cards that carry a credit balance from month to month.

So almost three-quarters of credit card users are paying interest on their credit balances.

Consumers spent an average of $15,963 on their credit cards in the year to April and carried an average account balance of $3234. Spending on cards increased by a fairly modest 3.3 per cent over that 12-month period but balances increased by 6.9 per cent, which means we are reining in our spending on cards but accumulating more debt.

Credit card issuers specify a minimum monthly payment, which they express in percentage terms. It ranges from 2 per cent to 3 per cent. As the example above shows, one of the biggest debt traps to fall into is paying only the minimum amount.

''Customers should always pay more than the minimum repayment each month as even a small amount extra can make a big difference over time,'' says a financial services analyst at Infochoice, David Lalich.

Another trap is continuing to use a card with a high interest rate when you carry a credit balance.

People like the idea of rewards and don't realise that in most cases the interest they pay on their credit balance negates any benefit they might receive from rewards.

Rewards cards with high rates are designed for ''transactors'' (people who pay their account in full each month). With rates now above 20 per cent, ''revolvers'' should be looking to switch to a low-rate card.

Infochoice has calculated the cost of repaying the $10,000 credit balance using a low-rate card. Using a rate of 10.84 per cent (the average of the five cards with the lowest rates) and making a minimum repayment of 2.5 per cent, or $250, a month, the cardholder would take four years and two months to pay off the balance and would pay total interest of $2463.

If the cardholder pays an extra $100 a month, the time needed to repay the balance would fall to two years and 11 months and the total interest cost would be $1619.

Lalich says: ''Consumers with a rolling balance on a fully featured card should switch to a low-rate option. The extra interest they pay on the fully featured card will almost always outweigh the benefits they receive.

''Simply by being a bit more savvy and shopping around for a better deal, a customer paying the minimum repayment each month could save thousands of dollars in interest by switching.

''Customers with multiple credit cards should always pay off the one with the highest interest rate first or consider consolidating the debts into one through a balance transfer offer.''

Govt launches new consumer credit code

AAP

New laws designed to stop exploitative practices by banks and lenders will better protect consumers, the federal government says.

The National Consumer Credit Code was today launched by Finance Minister Chris Bowen and Consumer Affairs Minister Tony Robinson in Melbourne.

It would improve consumer protection and reduce red-tape for lenders and brokers by introducing lending conduct requirements, boosting the availability of relief to loans of up to $500,000 and provisions to stop predatory lenders using exploitative practices.

The national credit reform package will come into effect on July 1, replacing state and territory-based credit laws in place since 1992.

Mr Bowen said the reforms would provide greater protection for Australian borrowers against unfair and predatory lending practices.

Financial institutions will be prevented from sending unsolicited offers to increase credit card limits to customers they know would find it difficult to manage a higher limit under the code.

"Using credit cards is very convenient for consumers but there is a real risk for some consumers of getting into unsustainable amounts of debt," Mr Bowen said.

"Ensuring lenders do not encourage customers to take on unsupportable amounts of debt is a key consumer protection measure, allowing consumers to enjoy the convenience of credit will reduce the risk of getting into problematic amounts of debt.

A single national licensing regime and consistent requirements nationwide for lenders and brokers would reduce the regulatory burden, Mr Bowen said.