THE CREDIT CARD TRAP
They’ve done it again, says Peter Higgins: banks have figured out a new set of tricks to turn your plastic into their gold
You’ve just finished paying off the overseas holiday and the Christmas presents but the credit card bills don’t quite add up. Why? The answer is simple, but the rationale is complex. The burgeoning credit card debt that we Australians are accumulating is due not just to interest rates but also to fees.
You see, the banks have divided us into two groups of credit card users. If you are the sort that pays off your credit card in stages – possibly even just paying the minimum amount each month – then you have been the bank’s friend for a long time. After all, you’ve been using your credit card as one of the most expensive forms of bank loan allowed by law.
On the other hand, there are those of us who pay off our credit cards in full each month and, until recently, we have evaded the clutches of our “service provider”. Up until recently using a credit card this way has been smart because it effectively used someone else’s money for cash flow while avoiding compound interest rates of 18.5% or more.
It did not take our financial institutions and credit providers long to work all this out, and now there are a number of new fees that are designed to catch we ‘cash flow card’ users. A good way to illustrate this is to recount a real-life story that occurred to someone I know who went on holiday over Christmas.
Mr J’s BIG NEW PURCHASE
Mr J had not purchased a ‘good’ camera for around twenty years and decided that he wanted one to suit his needs for the next twenty. He researched many cameras and eventually decided on a state-of-the-art modern digital camera. Mr J spent three months doing his homework – not just on the technology, but also on prices. On an overseas trip in Japan he haggled, negotiated, and did lots of walking. Indeed, he spent almost a full day figuring out where to buy a camera for the best price. Finally, after all this time and effort he purchased his dream camera. Mr J was pleased with all this effort because, at the end of the day, he calculated that he saved about $500.
But he paid for his purchase using a credit card, and his decision on which card to use was based on loyalty: loyalty to his bank, NAB, which he has been with for many years. Feeling pleased with himself he goes off and takes many memorable photographs with his new toy.
Yet a few weeks later when he receives his statement, he sees that the camera cost him almost $500 more than he expected. There is nothing on the statement to explain this – not even an exchange rate listed. Not even the original amount in local currency is stated, just the Australian dollar equivalent. He quickly emails his bank asking, “Why is this so?” The answer comes in a fashion that is becoming increasingly more common these days, a mixture of bureaucracy and arrogance mingled with a tincture of attitude that says,“This would be a great job if it weren’t for the customers”.
The bank’s response is that Mr J should have read his 52-page booklet of terms and conditions. If he had, he would have known that the bank chooses when to exchange currencies, and therefore what
exchange rate is used. And of course there is that fee of 1.5% (soon to rise to 2.5%) on the full Australian dollar equivalent.
Mr J sends more emails asking what all this means in normal language and could he have a breakdown of the figures that relate to his specific case. At time of writing, these exchanges have been continuing for over three months and he still does not have his answer. He does have more quotes from the corporate complaint manual about ‘escalating this to the next level’, but no real answers.
There are three lessons in Mr J’s story for all of us. The first is: Don’t choose a credit card on loyalty: it is misguided and not reciprocated. Choose a card that has the lowest fees, or no fees, and ask them before you go overseas when they will exchange currencies.
Secondly, force yourself to read the voluminous pages of legal gobbledygook that are sent to you. Whilst they may not make
immediate sense, these documents are what your financial institution uses to make all their decisions, and these decisions are not always in your best interests.
Finally, if you do have a legitimate complaint, do not expect a response that places customer service as the motivating drive of your credit provider. In fact, you will need to be persistent and have a hide as thick as a Credit Card Terms and Conditions Manual.
When I look at Mr J’s story, it seems to me that fees for international transactions come awfully close to double or even triple dipping. There is a fee for the privilege of using their credit card and buying something with it. On top of that, the credit provider chooses the most advantageous rate of exchange for them. Then, finally, they charge interest on everything.
So are financial institutions punishing loyalty? Have the financial institutions that we have stuck with and stood by for years traded customer service for profits? It’s an old chestnut I know, but it seems more relevant to ask the question now than ever before. Let’s look at a list of fees that are being charged by some financial institutions:
* Annual card fee from $25 to $99 per year.
* Late payment fee from $10 to $35 per month, and in some case per fortnight as well as interest repayments.
* International transaction fees – 1.5% (most banks will soon raise this to 2.5%) of the purchase amount.
* Cash advance fees by some banks including Westpac and ANZ 1.5% of amount of cash advance.
* Annual reward scheme fee – $15 up to $69 per year.
* Exceeding your credit limit – $4 to $25.
* Issuing a secondary card – $4 to $40.
* Refusal of periodical payment – $4 to $10.
* Replacing a lost card – $4 to $30.
* Duplicate statements – $4 to $10.
All in all, you could be up for hundreds or even thousands of dollars in fees each year if you don’t manage your credit card correctly.
We are all in the hands of credit providers but credit card usage can still be a smart way to buy goods and services. The playing field has changed dramatically over the past twelve months – and it is still changing – but as long as you know the rules you can still benefit financially. When you finish reading this magazine do an audit on your current credit card situation. How many do you have? What types? What financial institutions are providing you with credit cards? What rates are you being charged? What fees? Do you have an interest-free period? When you have completed your audit do some research on the Web. It should take no longer than thirty minutes. What available cards are better than yours? Which ones have the best rates or no fees? After your audit and research cut up your existing cards and send them back to your credit provider. If nothing else, it will empower you and make you feel great. Apply for no more than three credit cards from the providers that you have researched. Within three months, you will be in a better position than you are now. Remember that you are in control of your finances; our financial institutions are not in control of what we do. You will not only be better off financially if you regain or improve your control, but you will also feel empowered and revitalised. Go for it, you have nothing to lose except your Terms and Conditions Manuals. See you around the traps.
A FEW TIPS:
1. If you want to avoid paying interest on your credit purchases you must pay the full outstanding balance on your statement by the due date. If you don’t, you will be charged interest right back to the date of purchase on each item – this means you will forfeit the interest-free period on those purchases. What’s worse is that you must pay the balance off in full before you will get another interest-free period on any purchases. And if you don’t pay your balance off in full you will be charged interest on your full balance for that month and not what is left after your payment.
2. Say no to cash advances! Why? I am a bit surprised to hear that people still don’t realise that interest-free periods do not apply to cash advances. In fact, with the majority of credit providers you pay interest from the time you withdraw the money regardless of when you pay it off.
3. See if you are entitled to relationship partner discounts. If you have multiple accounts at your financial institution they may discount your credit card fees because of your other
accounts. If you have a mortgage and your bank secures all its accounts against your house, why are you still paying an interest rate as if your credit card is an unsecured high-risk loan for the bank? It is worth the ask.
4. Don’t be conned by marketing tricks. These are developed to appeal to your emotions. Reduced introductory interest rates and reward programs may not suit your financial situation or your spending pattens. Decide on a card based on logic and understand you purchase behaviours.
5. Know what you want.
6. Do you really want a reward program? These may seem attractive, but most institutions charge a hefty fee to be a member of their reward program. Have you also noticed that you now need more points to claim the same reward compared to a few years ago. In many cases you have to spend more to accumulate the same number of points compared to a few years ago. In most circumstances people are better off using a credit card with a low rate and little or no fees rather than joining a ‘loyalty’ program that sometimes costs more than it rewards.
7. Always pay off more than the minimum. Many credit providers are only asking for payments of 1.5% per month, which can be a trap because it is likely that you will take 2 years or more to pay off your purchase and accumulated interest bill.
8. Consolidate debt. If you owe large amounts on many cards it is in your best interest to consolidate debt and put all outstanding monies onto one loan, preferably a personal loan rather than a credit card, because the rates will be almost half that of most credit cards.