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.

 

Credit Card Trick #2 - Backdated Interest

If you pay your bill late or not in full, most companies will charge interest from the date of your original transactions.

If you're one day late, you could be charged on all transactions up to 55 days ago!

Credit card trick #1

Minimum payments don't cover the interest payable.

People think that by paying the minimum balance they have at least covered the interest... WRONG!!

Card companies reduce the minimum so it doesn't cover the interest.

Paying the minimum means you pay interest on the interest and dig a deeper debt hole!

(With thanks to David Koch in the Daily Tele, June 21, 2010.)
Kind Regards,
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Charles Fairlie
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Helping Aussies Avoid Bankruptcy

Have a look at our FAQ's to see how we can help you avoid bankruptcy... http://www.nobankruptcy.com.au/

Distressing debt figures

The debt figures, particularly the amount owing as cash advances, are a real worry...

 

http://www.dailytelegraph.com.au/money/money-matters/aussies-face-avalanche-of-cash-advances-on-credit-cards/story-fn300aev-1225879295178

 

 

Banks should be ashamed!

Article in today’s SMH... For Commonwealth Bank, 63 per cent of workers reported the debt-selling pressure, while 53 per cent of Commonwealth Bank-owned Bankwest employees reported the focus....

 

http://www.smh.com.au/business/bank-workers-fret-over-customer-debt-20100609-xudq.html

Retailers fighting for market share with credit cards

Retailer-branded cards are fighting for market share from other credit cards, but are they worth comparing? RateCity investigates.

May 27, 2010

We are constantly bombarded with options for both credit cards and store cards -just open up your letter box for promotions on credit cards or walk through your favourite department store where someone is bound to hand you a flyer about their store card. But how do you know which is the better card for you?

What's the difference?
Both types of cards offer customers with an opportunity to buy now and pay later; however there are a few unique differences between the two.

A credit card is a plastic card with a magnetic strip that people obtain through financial institutions to purchase goods and services as well as withdraw cash. They are issued with credit limits and both purchases and cash withdrawals incur interest rates. Some also provide points for spending money on the card.

A store card is similar to a credit card in that it is used to purchase items on credit however they can only be used within a particular store or range of stores, for example the Myer Card can only be used at Myer stores and charges a high 21.99 percent per annum at the time of writing.

But as our love of credit cards grows some larger retail chains are upgrading their store cards to offer a credit card with Visa, MasterCard of American Express so that you can use them anywhere which means more often. The GE Money Coles Group Source MasterCard, David Jones American Express Credit Card and Woolworths Everyday Money Credit Card are some examples, you can use them virtually anywhere and there are often bonus promotions for using the card at the card's branded retailer.

So how to choose which type of card?
With so much choice, here are six tips to follow that may help you in deciding which card is best for you and your lifestyle:

1.     Compare credit cards online to find a credit card that offers a low interest rate and more rewards.

2.     Look at the reward programs on offer and see which one will suit your spending habits.

3.     Look at the way you shop, if you regularly shop at one store and it offers a store card or credit card perhaps look at the benefits you will receive versus a standard credit card.

4.     Look out for a card that offers longer interest free days which gives you a period to pay back the balance of your card without paying extra.

5.     Look for a card that is more readily accepted so you won't be limited to where you shop.

6.     Does the card charge an annual fee? If you don't pay off your balance in time each month it may be worth paying an annual fee to receive a lower interest rate.

Dave Ramsay's take on Bankruptcy

The Truth About Bankruptcy

from daveramsey.com on 03 Aug 2009

Myth: I'll just file bankruptcy and start over; it seems so easy.
Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.

Bankruptcy.

That word sends chills up the spine. If you're facing the prospect of bankruptcy or in the middle of it right now, you know it's a living nightmare. It can devastate your job, destroy your marriage and steal your peace of mind.

Kathy called my radio show ready to file bankruptcy. Her debts were overwhelming, and her cheating husband had left with his girlfriend. The house was in his name, as was all the debt except $11,000. Kathy was 20 years old, and her brilliant uncle—a lawyer from California—told her to file bankruptcy. Kathy was beat up, beat down, and deserted without help, but she was not bankrupt. When her soon-to-be ex-husband ends up with all the debt in his name, he may be bankrupt, but Kathy won't be.

Why Avoid Bankruptcy?

Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of bankruptcy if given the opportunity. Few people who have been through bankruptcy would report that it is a painless wiping-clean of the slate, after which you merrily trot off into your future to start fresh.

Don't let anyone fool you. I have been through bankruptcy and have worked with bankruptcy for decades, and it is not a place you want to visit. Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and loss of a loved one. I would never say that bankruptcy is as bad as losing a loved one, but it is life-altering and leaves deep wounds both to the psyche and the credit report.

Types of Bankruptcy

Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for10 years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.

Most bankruptcy cases can be avoided with proper help, such as our certified counselors and the Total Money Makeover. Your Total Money Makeover may involve extensive amputation of stuff, which will be painful, but bankruptcy is much more painful. If you take the thoughtful step backward to get on solid ground instead of looking at the false allure of the quick fix that bankruptcy seems to offer, you will win more quickly and easily. I know from personal experience the pain of bankruptcy, foreclosure, and lawsuits. Been there, done that, got the t-shirt, and it is not worth it.

Rise in middle-class bankrupts

DANIELLA MILETIC - SMH

May 24, 2010

PROFESSIONALS and people on high incomes are declaring bankruptcy faster than ever in Australia, according to a study that reveals bankruptcies have risen by more than a third in the past four years.

The report contradicts the common belief that most people who file for bankruptcy are either chronically poor with no other options or the hugely wealthy avoiding debt obligations.

Bankruptcy is increasingly becoming a ''middle class phenomenon'' in Australia, says the report from the University of Melbourne Centre for Corporate Law and Securities Regulation.

Professor Ian Ramsay, an author of the report, which will be published later this year, said the number of personal bankruptcy filings jumped by 6 per cent in 2008-09, after rising steadily over the past four years. There were 27,520 in 2008-09, an increase of 34 per cent since 2004-05, when there were 20,501 cases of bankruptcy. In 2009 the number of personal insolvency cases (which mainly involves bankruptcy but includes debt agreements) shot up to 36,487.

In an earlier study Professor Ramsay and his co-author, Cameron Sim, found that since 1990 there had been a 300 per cent increase in the number of personal insolvencies in Australia, far exceeding population growth and indicating a strong middle-class presence.

In their recent report Personal Insolvency in Australia, they have focused on middle class bankruptcy profiles. ''There are so many urban myths about bankrupts … students skipping on credit card bills, wealthy hiding assets who prefer to go into bankruptcy,'' Professor Ramsay said. ''They exist but are not indicative of the typical bankrupt.

''One of the biggest findings was that more and more of the middle class are being claimed by bankruptcy and, to us, it seems a social problem that has escaped notice.''

Because the phenomenon of the middle class bankrupt is so unheard of, Professor Ramsay said that Australians were largely unaware of the social costs to those affected, which includes tarnished credit ratings, difficulty in the workforce, cost to personal relationships and the still-prevalent stigma attached to becoming bankrupt.

He said insolvents are increasingly from higher-status occupations, have higher levels of personal and household income, and have rising asset and property ownership levels.

A major cause of rises in bankruptcy among the middle class, said Professor Ramsay, has been due to unsustainable home loans. Excessive use of credit as a cause of bankruptcy has jumped significantly in recent years, he added.

June interest rates steady

Thank goodness interest rates didn’t go up again... not only do they affect your mortgage but they also bump up your credit card repayments...!