Credit Fees are beginning to bite

Credit card fees are increasing and more credit card customers are being hit with penalty fees imposed on their plastic, financial counsellors warn.

With the average credit card debt now nudging $3000, up from $1836 in 2001, more and more card-holders are being hit with late fees, over-the-limit charges and other penalties that can be as high as $40 a pop.

According to Carol O'Brien, a financial counsellor with Lifeline Brisbane, penalty fees make it harder for people to get out of debt and can be the straw that breaks the camel's back in some households.

"When you get caught in that cycle, it's very difficult to get back out again," she explains.

"A lot of our clients get themselves in so deep with massive credit card debt that the only way out they can see is bankruptcy."

Financial counsellors' concerns are backed up by a Reserve Bank of Australia study released last month that showed the total fees paid by households on credit cards rose by 13 per cent in 2006, four times the rate of inflation.

The study also revealed that the banks now raked in more than $1 billion in fees each year from their household credit card operations alone.

With average over-the-limit fees increasing from $18 to $31 (or 73 per cent) in five years and average late penalties up 49 per cent in the same period, even supposedly low-cost cards can morph into "monsters", says Harry Senlitonga, a financial analyst with research firm Cannex.

"Consumers think they are doing the responsible thing by getting a no-frills card but even a few spending and repayment misdemeanours can make any credit card a lot more expensive than anticipated," he says.

Mr Senlitonga calculates that an interest rate of less than 10 per cent quickly balloons out to about 22 per cent over a year if two late payment penalties of $25 each and two over-the-limit penalties of $35 each are incurred.

"Most of us get caught with credit card penalties on the odd occasion but consumers who regularly incur penalty fees due to household budget pressures are building their debt," he says.

Penalty fees are as widespread as they are ruthless. For instance, of the 245 credit cards Cannex analysed in a recent report, only three imposed no fee on people exceeding their credit limits.

Fiona Hawkins, a financial counsellor with Relationships Australia, says anyone thinking about taking up a card offer is urged to read the fine print first, to understand which fees will apply and in what circumstances.

"When you're entering into a credit card contract, you should treat it very much like a complex game of Monopoly," she said.

"If the bank knows the rules and you don't, it's not a fair game, especially if the rules aren't reasonable."

Meanwhile, the Australian Bankers Association claims the average price of banking services in Australia is actually falling.

In its Fees for Banking Services 2007 Report, Kim Hawtrey, associate professor of economics at Macquarie University, notes that "customers are choosing cheaper banking options and the number of transactions continues to increase".

Prof Hawtrey also points out the growth in some fees needs to be viewed in the context of more competitive interest rates, particularly in housing.

But consumer groups are calling on financial institutions to cut penalty fees, in line with international developments.

For example, the British Fair Trading Office last year found that late payment fees were unfair and did not reflect of the cost of dealing with a late payment. Banks were forced to cut their average penalty charges for credit cards by more than half.

Gordon Renouf, manager of policy and campaigns at consumer organisation Choice, says the severity of the penalties imposed by banks in Australia on consumers who pay late, or breach credit limits, are also out of all proportion. They also weigh most heavily on those who already experiencing financial difficulties.

"For some people, it only takes one thing to go wrong with their financial planning and all the cards come tumbling down," he says.

Ms O'Brien advises staying a little under your limit. That way, you won't be tipped over the edge when interest is added at the end of the month.

Choosing a credit card to suit your spending patterns also is important.

For instance, Mr Senlitonga says impulse spenders who use their card for things like shopping sprees, holidays and emergencies should look for a very low rate card with a low or no annual fee.

By contrast, everyday spenders who put all their regular purchases like groceries and petrol on the card, but paid off the balance in full each month, should consider cards that provided extra loyalty features and perks that would be of value to them.

Source: Sunday Mail