Credit card debt is at its highest level ever for the average Australian credit card holder, but spending is being driven by retail purchases, rather than cash advances by families trying to make ends meet.
Figures released by the Reserve Bank yesterday showed total credit card debt topped $40 billion.
The average debt also rose, climbing by 7.2 per cent to $2990 in May, 2007.
Total value of cash advances fell to $1.086 billion in May from $1.135 billion at the same time last year.
CommSec economist Martin Arnold said the strength of the Australian economy had provided some of the impetus for the rise in credit debt, with the data pointing to continued resilience on the part of the consumer in the face of talk of rising inflation and lower affordability for housing.
"With the jobs market so robust and household income rising, we're going to see continued strength in consumer spending," Mr Arnold said.
It follows upbeat profit announcements by furniture and consumer electronics retailer Harvey Norman, reporting a 16.5 per cent sales gain, and David Jones predicting a 34.2 per cent increase in its profit forecast.
Australian National Retailers Association CEO Margy Osmond said yesterday the full effects on spending behaviour of the tax cuts in the recent federal Budget could sustain strength in retail spending.
"This is positive news considering the May retail sector figures showed some signs of a slowdown in spending. Clearly consumer sentiment is still high and consumers are comfortably splashing out on the latest gadgets and home entertainment goods," she said.
For young newlyweds, Juan Ostos and Francy Perilla, positive career prospects and affordable prices meant the time was ripe to set up everything they need for a new home.
The couple were happy to splash out on a second laptop and new dryer in a day, at a cost of over $1500.
Ms Perilla, 29, who works as a sales consultant, said she and her husband, an electrical engineer, were now in a comfortable financial position.
"We are better off financially than we were one year ago," she said.
"We are in the process of buying all those things we need."
Cashback offers and interest-free options meant forking out the money did not trouble the pair.
"We will pay a percentage now, and then pay the bulk of (the item's price) in one year, " Mr Ostos said.
Earlier in the year the couple also decided to upgrade their car.
With both working full time, the couple said they share the cost of all their new buys, paying half each.
"We split everything, " he said.Source: Dalily Telegraph
Monday, July 23, 2007
Thursday, July 19, 2007
Credit Card debt average now over $3,000
Australia's reliance on credit cards has continued with the total outstanding balance on Australian credit cards surging above $40 billion for the first time, new data shows.
The total credit card balance rose by $4.3 billion to $40.2 billion compared to $35.9 billion a year ago, figures released today by the Reserve Bank of Australia (RBA) revealed.
The value of repayments rose by 3.5 per cent to $17 billion compared to $16.5 billion a year ago.
The average debt on Australian credit cards has also risen, climbing by 7.2 per cent to $2990 in May 2007.
Consumer coping with credit card debt
However, CommSec economist Martin Arnold said while the number of purchases and transactions continues to rise, the value of cash advances as a proportion of the total balance has fallen.
“People are continuing to use their credit cards more effectively ... for any purchases really and then making repayments within the interest free period ... using the interest free period more effectively,'' Mr Arnold said.
The total value of cash advances fell to $1.086 billion, compared to $1.135 billion at the same time last year.
”Rather than showing people are struggling, using cash advances to make ends meet, it suggests consumers are doing quite well,'' Mr Arnold said.
Mr Arnold said the strength of the Australian economy had provided some of the impetus for the rise in credit debt, with the data pointing to continued resilience on the part of the consumer in the face of talk of rising inflation and lower affordability for housing.
”With the jobs market so robust and household income rising, we're going to see continued strength in consumer spending.''
Source: AAP
The total credit card balance rose by $4.3 billion to $40.2 billion compared to $35.9 billion a year ago, figures released today by the Reserve Bank of Australia (RBA) revealed.
The value of repayments rose by 3.5 per cent to $17 billion compared to $16.5 billion a year ago.
The average debt on Australian credit cards has also risen, climbing by 7.2 per cent to $2990 in May 2007.
Consumer coping with credit card debt
However, CommSec economist Martin Arnold said while the number of purchases and transactions continues to rise, the value of cash advances as a proportion of the total balance has fallen.
“People are continuing to use their credit cards more effectively ... for any purchases really and then making repayments within the interest free period ... using the interest free period more effectively,'' Mr Arnold said.
The total value of cash advances fell to $1.086 billion, compared to $1.135 billion at the same time last year.
”Rather than showing people are struggling, using cash advances to make ends meet, it suggests consumers are doing quite well,'' Mr Arnold said.
Mr Arnold said the strength of the Australian economy had provided some of the impetus for the rise in credit debt, with the data pointing to continued resilience on the part of the consumer in the face of talk of rising inflation and lower affordability for housing.
”With the jobs market so robust and household income rising, we're going to see continued strength in consumer spending.''
Source: AAP
Sunday, July 15, 2007
Platinum credit cards are top of the line
Perks such as celebrity golf outings, free travel insurance, priority reservations at top restaurants and emergency access to a doctor in a remote area can be yours with a platinum credit card.
Introduced by credit card innovators American Express as a charge card and now offered by most financial institutions, platinum has taken over from gold in the premium credit card stakes to become the essential wallet accessory for the well-to-do and upwardly mobile.
And it's never been easier to go platinum as many financial institutions no longer apply annual income limits, to the point where the average Joe is likely to qualify if his credit rating is up to scratch.
But with annual fees ranging from $89 to $395 a year (or $900 a year in the case of Amex's platinum charge - as opposed to credit - card), are these credit cards good value for money or simply a piece of plastic with which to stroke one's ego?
VALUE FOR BIG SPENDERS WHO USE CREDIT CARDS
The best way to assess whether it is worth upgrading to platinum is to weigh up the value of the perks on offer against the annual fee being charged. Interest rates vary, but it's the "extras" that make platinum credit cards different.
But comparing perks isn't that easy. How much you spend on your card each year and the lifestyle you lead have a huge bearing on whether you can take full advantage of the rewards or benefits on offer.
The latest credit card survey by financial researcher Cannex shows the best value-for-money platinum cards for big spenders (categorised as those who spend up to $60,000 a year on their credit card but are able to pay off their balance each month) are offered by StGeorge, Citibank, Commonwealth Bank, HSBC and Westpac.
LOW FEES SUIT LOW SPENDERS
If your annual expenditure is unlikely to exceed more than about $12,000 a year or $1000 a month, then it may be better to choose a low-fee, service-oriented card where you don't have the pressure of having to rack up points to take advantage of a reward program.
While it also rates well for high spenders, the low-fee platinum card offered by St George offers a concierge service (see breakout), free international travel insurance and other benefits, but little in the way of a rewards program. Consumers weighing up the benefits of this card have to ask themselves if they are prepared to pay $89 a year to access a concierge service and the other benefits.
For many the answer is yes, says Sabina Zeljko, senior manager, credit cards, for StGeorge, who says its platinum concierge service is the same as most concierge services because MasterCard and Visa mandate a level of service that all card issuers have to meet.
Zeljko says while only a small percentage of St George platinum cardholders have taken advantage of the concierge service (the card was only launched in December), she expects numbers to grow.
Madeline O'Connor, head of cards marketing for Citibank, says those that have used the Citibank's concierge service once tend to become regular users.
WITH PLATINUM CREDIR CARDS
Compared with weighing up the merit of a concierge service, it's a much more tricky exercise to work out the true value of the rewards-based programs. "You need to know yourself and know the product," says Cannex financial analyst Harry Senlitonga.
He agrees that this is more easily said than done. For a start, the amount you need to spend to gain frequent flyer points varies, as does the value of frequent flyer points with different airlines.
Moreover, Reserve Bank reforms allowing merchants to apply surcharges to credit-card transactions have diluted the value of some programs, and some point systems have expiry dates.
But, importantly for those considering upgrading to platinum from gold, some platinum programs are more generous than the gold and the extra points you earn may compensate for paying a higher annual fee.
Cannex figures show American Express offers the most generous platinum reward program for free air travel. Not only do holders of an Amex platinum credit card qualify for a free domestic flight each year, but they (and holders of the Westpac Altitude Platinum Amex card) also need spend only $10,667 to qualify for a Sydney or Melbourne return trip to London on Qantas.
This compares with an annual expenditure of about $16,000 required by most gold cards, as well as most of the other platinum cards for free domestic Qantas flights.
Meanwhile, Amex platinum cardholders wanting to qualify for a free overseas trip need only rack up an annual expenditure of $85,333, compared with more than $120,000 for most of the other cards.
INSTANT GRATIFICATION WITH PLATINUM CREDIT CARDS
When it comes to "instant" benefits, such as free travel insurance, going platinum starts to look like a smart move for those who travel overseas at least once a year.
A recent study by Cannex found that cardholders could save hundreds of dollars a year by using the travel insurance packages on offer. "Most people used to assume that the travel insurance offered by credit card companies was inferior to the stand-alone product, but we found that the platinum cards were very competitive in this area," Senlitonga says.
That said, there are significant differences between the travel insurance offered by the various platinum cards. Senlitonga says to carefully read the fine print.
So what card does Senlitonga carry? "For me, gold is good enough until I spend more than my current expenditure of about $1000 a month."
You can see the cannex web site for a more detailed comparison of credit cards.
$900 a year gets jacket from Paris.
Despite forking out about $4500 in fees since he became an American Express platinum charge card holder in 2002, Giang Nguyen (pictured) is convinced the card offers excellent value for money.
An IT executive who frequently travels overseas, he uses the card's complimentary concierge service at least once a week.
The 34-year-old single Melburnian has called on the service to arrange tickets for a Cirque de Soleil performance in Las Vegas, ringside seats at the Australian Tennis Open, entry to London nightclubs and flower deliveries to overseas hotel rooms.
"There doesn't seem to be anything the concierges can't do," says Nguyen, who has come to rely on the service in the same way many executives rely on their personal assistants.
Nguyen uses the concierge team for personal shopping - they recently organised for a Hermes jacket to be sent from Paris when his size was unavailable in Australia. Nguyen says these services coupled with the Amex rewards program means he can justify paying the card's annual fee of $900.
He carries other credit cards to overcome the problem of the Amex card being less widely accepted than MasterCard and Visa.
And he isn't fazed when some merchants charge him an additional transaction fee (which on occasions is as high as three per cent).
"This is a small inconvenience," he says.
Source: The AGE
Introduced by credit card innovators American Express as a charge card and now offered by most financial institutions, platinum has taken over from gold in the premium credit card stakes to become the essential wallet accessory for the well-to-do and upwardly mobile.
And it's never been easier to go platinum as many financial institutions no longer apply annual income limits, to the point where the average Joe is likely to qualify if his credit rating is up to scratch.
But with annual fees ranging from $89 to $395 a year (or $900 a year in the case of Amex's platinum charge - as opposed to credit - card), are these credit cards good value for money or simply a piece of plastic with which to stroke one's ego?
VALUE FOR BIG SPENDERS WHO USE CREDIT CARDS
The best way to assess whether it is worth upgrading to platinum is to weigh up the value of the perks on offer against the annual fee being charged. Interest rates vary, but it's the "extras" that make platinum credit cards different.
But comparing perks isn't that easy. How much you spend on your card each year and the lifestyle you lead have a huge bearing on whether you can take full advantage of the rewards or benefits on offer.
The latest credit card survey by financial researcher Cannex shows the best value-for-money platinum cards for big spenders (categorised as those who spend up to $60,000 a year on their credit card but are able to pay off their balance each month) are offered by StGeorge, Citibank, Commonwealth Bank, HSBC and Westpac.
LOW FEES SUIT LOW SPENDERS
If your annual expenditure is unlikely to exceed more than about $12,000 a year or $1000 a month, then it may be better to choose a low-fee, service-oriented card where you don't have the pressure of having to rack up points to take advantage of a reward program.
While it also rates well for high spenders, the low-fee platinum card offered by St George offers a concierge service (see breakout), free international travel insurance and other benefits, but little in the way of a rewards program. Consumers weighing up the benefits of this card have to ask themselves if they are prepared to pay $89 a year to access a concierge service and the other benefits.
For many the answer is yes, says Sabina Zeljko, senior manager, credit cards, for StGeorge, who says its platinum concierge service is the same as most concierge services because MasterCard and Visa mandate a level of service that all card issuers have to meet.
Zeljko says while only a small percentage of St George platinum cardholders have taken advantage of the concierge service (the card was only launched in December), she expects numbers to grow.
Madeline O'Connor, head of cards marketing for Citibank, says those that have used the Citibank's concierge service once tend to become regular users.
WITH PLATINUM CREDIR CARDS
Compared with weighing up the merit of a concierge service, it's a much more tricky exercise to work out the true value of the rewards-based programs. "You need to know yourself and know the product," says Cannex financial analyst Harry Senlitonga.
He agrees that this is more easily said than done. For a start, the amount you need to spend to gain frequent flyer points varies, as does the value of frequent flyer points with different airlines.
Moreover, Reserve Bank reforms allowing merchants to apply surcharges to credit-card transactions have diluted the value of some programs, and some point systems have expiry dates.
But, importantly for those considering upgrading to platinum from gold, some platinum programs are more generous than the gold and the extra points you earn may compensate for paying a higher annual fee.
Cannex figures show American Express offers the most generous platinum reward program for free air travel. Not only do holders of an Amex platinum credit card qualify for a free domestic flight each year, but they (and holders of the Westpac Altitude Platinum Amex card) also need spend only $10,667 to qualify for a Sydney or Melbourne return trip to London on Qantas.
This compares with an annual expenditure of about $16,000 required by most gold cards, as well as most of the other platinum cards for free domestic Qantas flights.
Meanwhile, Amex platinum cardholders wanting to qualify for a free overseas trip need only rack up an annual expenditure of $85,333, compared with more than $120,000 for most of the other cards.
INSTANT GRATIFICATION WITH PLATINUM CREDIT CARDS
When it comes to "instant" benefits, such as free travel insurance, going platinum starts to look like a smart move for those who travel overseas at least once a year.
A recent study by Cannex found that cardholders could save hundreds of dollars a year by using the travel insurance packages on offer. "Most people used to assume that the travel insurance offered by credit card companies was inferior to the stand-alone product, but we found that the platinum cards were very competitive in this area," Senlitonga says.
That said, there are significant differences between the travel insurance offered by the various platinum cards. Senlitonga says to carefully read the fine print.
So what card does Senlitonga carry? "For me, gold is good enough until I spend more than my current expenditure of about $1000 a month."
You can see the cannex web site for a more detailed comparison of credit cards.
$900 a year gets jacket from Paris.
Despite forking out about $4500 in fees since he became an American Express platinum charge card holder in 2002, Giang Nguyen (pictured) is convinced the card offers excellent value for money.
An IT executive who frequently travels overseas, he uses the card's complimentary concierge service at least once a week.
The 34-year-old single Melburnian has called on the service to arrange tickets for a Cirque de Soleil performance in Las Vegas, ringside seats at the Australian Tennis Open, entry to London nightclubs and flower deliveries to overseas hotel rooms.
"There doesn't seem to be anything the concierges can't do," says Nguyen, who has come to rely on the service in the same way many executives rely on their personal assistants.
Nguyen uses the concierge team for personal shopping - they recently organised for a Hermes jacket to be sent from Paris when his size was unavailable in Australia. Nguyen says these services coupled with the Amex rewards program means he can justify paying the card's annual fee of $900.
He carries other credit cards to overcome the problem of the Amex card being less widely accepted than MasterCard and Visa.
And he isn't fazed when some merchants charge him an additional transaction fee (which on occasions is as high as three per cent).
"This is a small inconvenience," he says.
Source: The AGE
Easy credit card and cash loans ands easy mortgages are driving more to insolvency
Taking advantage of fast easy credit cards and cash loans are increasing debt and insolvency.
Despite low unemployment figures, economic growth and high consumer confidence, personal bankruptcies went up by 17 per cent in the 2006-07 financial year.
David Tennant, chairman of the Australian Financial Counselling and Credit Reform Association, said more ordinary Australians were finding it difficult to make ends meet.
Over the last six months his Care Financial Counselling Service has recorded a ten per cent rise in people needing assistance.
"The debt explosion is not because people are necessarily leading an extravagant lifestyle it is because it has become much harder for ordinary households to make ends meet, so they use credit cards and payday loans to bridge the gap.
"The deeply disturbing trend ... is a subtle shift from low-income to now medium-low income households simply not having enough money to have the basic lifestyle."
Mr Tennant said it was a relief that housing affordability was now a national issue because his group had been trying to draw attention to it for years.
A spokeswoman from consumer advocacy group CHOICE said a drop in house prices also had inadvertently put borrowers in the red.
"It's very disturbing when people sell their house and still can't reach payments for the outstanding mortgage," she said.
"There is a huge amount of individual responsibility required but it is also very hard when people are presented with all these finance opportunities. People don't think something bad is going to happen and then someone falls ill or a car repair is required.
"Australian consumers are under a lot of pressure to buy homes, to have a family home. They are told they can have a dream home. It is good to have confidence but you can't extend yourself."
The spokeswoman said there were grave concerns with fast loans when there was only limited testing of borrowers' ability to pay.
Bob Cruickshanks, deputy officer receiver for the Insolvency and Trustee Service Australia, said financial institutions were relaxing their means tests because of greater competition.
"Super funds are awash with cash and when you look around in Sydney there aren't really big projects absorbing it, so there is more money available and greater competition for the smaller finance companies to compete for borrowers.
"But the Department of Fair Trading has been like a hawk stamping out dodgy credit companies," he said.
Source: AAP
Despite low unemployment figures, economic growth and high consumer confidence, personal bankruptcies went up by 17 per cent in the 2006-07 financial year.
David Tennant, chairman of the Australian Financial Counselling and Credit Reform Association, said more ordinary Australians were finding it difficult to make ends meet.
Over the last six months his Care Financial Counselling Service has recorded a ten per cent rise in people needing assistance.
"The debt explosion is not because people are necessarily leading an extravagant lifestyle it is because it has become much harder for ordinary households to make ends meet, so they use credit cards and payday loans to bridge the gap.
"The deeply disturbing trend ... is a subtle shift from low-income to now medium-low income households simply not having enough money to have the basic lifestyle."
Mr Tennant said it was a relief that housing affordability was now a national issue because his group had been trying to draw attention to it for years.
A spokeswoman from consumer advocacy group CHOICE said a drop in house prices also had inadvertently put borrowers in the red.
"It's very disturbing when people sell their house and still can't reach payments for the outstanding mortgage," she said.
"There is a huge amount of individual responsibility required but it is also very hard when people are presented with all these finance opportunities. People don't think something bad is going to happen and then someone falls ill or a car repair is required.
"Australian consumers are under a lot of pressure to buy homes, to have a family home. They are told they can have a dream home. It is good to have confidence but you can't extend yourself."
The spokeswoman said there were grave concerns with fast loans when there was only limited testing of borrowers' ability to pay.
Bob Cruickshanks, deputy officer receiver for the Insolvency and Trustee Service Australia, said financial institutions were relaxing their means tests because of greater competition.
"Super funds are awash with cash and when you look around in Sydney there aren't really big projects absorbing it, so there is more money available and greater competition for the smaller finance companies to compete for borrowers.
"But the Department of Fair Trading has been like a hawk stamping out dodgy credit companies," he said.
Source: AAP
Friday, July 13, 2007
Credit card debt reduction always a good idea
With the average credit card balance at its highest ever and households handing over a record proportion of their income in interest payments, people are starting to talk about turning back the clock on debt.
Some researchers are seeing a change in attitude to indebtedness among the under-25s in particular - a harking back to the financial caution exercised by their grandparents and great-grandparents.
Members of the internet generation may be more inclined to take a back-to-basics approach to consumption, says social and economic commentator Phil Ruthven, saving for the goods they want, rather than racking up credit card debt and personal loans.
"I think we will begin to see some more financial sanity emerging," Ruthven says of emerging consumers.
"The [net generation isn't] terrified of debt to the extent our parents and grandparents might have been, saving up for everything," he says.
"We're not going to move back that far - but I think the net generation are likely to be much more prudent and savvy with their finances."
This will be in reaction to witnessing debt cause stress among family and friends, but also part of the personality of this particular generation.
"The net generation is a 'civics' generation, which comes around every four generations," Ruthven says. "You could describe it as a little less materialistic - they see material things as a means to an end, rather than an end in themselves."
Social researcher Mark McCrindle, of McCrindle Research, says generation Y - teenagers to those aged in their mid-20s - has grown up with credit cards and never known a recession, so this age group tends to have high consumer expectations.
"But there's light at the end of the tunnel," he says. "They are the most materially endowed generation ever but they've found that doesn't satisfy them - that there's got to be something more. So there's a 'live slow' movement, a 'buy slow' movement - there's some little glimpse of what might change."
For now, financial advisers say that even clients on good incomes are experiencing stress over the level of their borrowing. It may not be enough to tip them over the edge financially but they are nevertheless feeling less than comfortable.
In lower-income communities, debt counsellors are seriously concerned about the prospect of an interest rate rise in coming months and outright dismayed by speculation there could two to three rate rises in the next 12 months.
Trading on the bond market indicates that an official rate rise of a quarter of a percentage point is an even bet for August and a certainty by November, with another rise priced into bonds for the first half of next year.
Rory Robertson, an interest rate analyst at Macquarie Bank, says the Australian Bureau of Statistics's inflation report, due out on July 25, will "make or break" the case for a rate rise as early as August.
By his reckoning, if the consumer price index trend figure is above 0.5 per cent, the Reserve Bank will act.
Advisers say such circumstances make it more important than ever to go back to the basics: budgeting, saving, and being disciplined about repaying any debts.
"The two words I use are planning and discipline," says Laura Menschik, the managing director of WLM Financial Services.
"People have to understand the difference between buying something right now and doing it a bit later, when they've been disciplined and saved for it - or even going without because they may not need it."
Menschik rolls off some examples: if you use the redraw facility on your mortgage to buy things, be disciplined about repaying that money over a couple of years rather than 25 years; leave a buffer for unexpected events such as the car breaking down or your roof blowing off; pay more than the bare minimum on your cards and loans.
And think about cutting up your cards. Menschik isn't alone in seeing people set about getting their finances in order - often by consolidating their debts in their mortgage or a personal loan at a lower rate - only to fall off the wagon and run their credit cards up again.
Karen Cox, the co-ordinator of the NSW Consumer Credit Legal Centre, says people don't always address the underlying problem that got them into debt in the first place, "which is that they're just living beyond their means".
"I don't say that in a judgemental way - I know a lot of people are struggling just to meet everyday expenses," Cox says. "But having debt doesn't help. It just makes it worse."
Financial planner Suzanne Baldry, of Baldry Financial Group, says a budget should be the foundation of any financial strategy.
Budgets might be considered boring and old-hat, but they work, she says - as long as they're the right way round.
"You've got to work out what your commitments are before you work out what you're going to spend - not the other way around," she says.
"It's not a case of 'what have I got left over for my debt repayments'."
Lisa Armstrong, the head of consumer advocacy for mortgage broker Resi, says people tend to fall back into old patterns if they don't change something about their spending behaviour.
She suggests reducing the limits on your credit cards - and resisting offers to move them higher. You should be able to pay off your card debt every month, she says.
Even better, switch to a debit card that has the convenience of a credit card but uses your own money.
Heaven forbid, you might even consider using cash again.
"It's just not an emotional transaction when you hand over a card - it has no meaning to us," Armstrong says. "But when you hand over your hard-earned cash, out of your wallet, you can see what [that purchase] has just cost you."
Money asked the experts to tell us what works and what doesn't when it comes to modern-day debt.
Mortgage redraw
Rather than running up credit card debt at interest rates of 16 or 17 per cent, many people now use their mortgages to fund consumption - a practice that financial planner Suzanne Baldry says is turning mortgages into "residential ATMs".
People draw on the equity in their home, or redraw extra payments they've already made, for spending such as renovations, holidays, clothes, cars and flat-screen TVs.
Alternatively, they consolidate more expensive debts by rolling them into their mortgage.
Baldry says this is fine so long as you're disciplined about repaying that money quickly, rather than spreading it over 25 or so years.
"Not increasing payments to cover this is bad news," she says.
Denis Orrock, of researcher InfoChoice, agrees. He says that doing so spreads a debt that would normally be paid off in three or five years across two decades, adding thousands of dollars in interest charges despite the lower rate (see table, above right).
"Putting debt into the mortgage is a great idea, but you have to pay more," says Lisa Montgomery of Resi.
"You have to pay a lot like you were paying before [when the debt was on your credit cards]."
Personal loans
Orrock says personal loans may be more costly than home loans but they have the advantage of instilling discipline in borrowers.
"Some people do need the discipline of a certain payment every month for a set period to pay things off," he says. "There's a lot to be said for that."
St George Bank's head of consumer lending, Ed Box, says personal loans are much more flexible these days - they can be fixed or variable rate, and some now allow early repayments. He advises tailoring your personal loan to suit your circumstances - for instance, by having the repayment periods set weekly, fortnightly or monthly, in line with when you receive your pay.
Credit cards
A lower rate may not mean you're better off when it comes to credit cards. The consumer group Choice says whether you're better off will depend on the way the interest on overdue amounts is calculated.
You could be worse off if the card charges daily interest on the full, original purchase amount even if some of the balance was repaid on time, or if interest is charged right back to the original purchase date rather than from due date or statement date. Also, you might lose your interest-free period for new purchases if any debt is carried over from the previous month.
Interest-free deals
It's tempting to take advantage of "buy now, pay later" deals but Karen Cox says the Consumer Credit Legal Centre sees a lot of people struggling with very-high-interest debt that started out as interest-free debt. Sometimes no repayments are required at all for the interest-free period, and people take the optimistic view that they'll be able to pay for the goods after the one-, two-or even four-year period.
But that may not happen, or their circumstances may even be worse, Cox says, and the debt ticks over onto a very high rate of interest.
"Others require regular repayments but the repayment you're told to make is based on the standard minimum credit card payment and has nothing to do with paying it off in the interest-free period," she says. "People think they're paying it off but they're actually not. You make a fairly small hole in it on some of them."
Retailer David Jones provides two figures for interest-free options when it sends out its monthly store card statement: the minimum payment due and the amount "payable to minimise further interest charges".
The minimum payment is lower than the amount that would "minimise" interest charges.
Cox says some lenders don't even provide this level of information.
For all those reasons, consumers should think twice before flashing their plastic.
Source: Sydney Morning Herald
Some researchers are seeing a change in attitude to indebtedness among the under-25s in particular - a harking back to the financial caution exercised by their grandparents and great-grandparents.
Members of the internet generation may be more inclined to take a back-to-basics approach to consumption, says social and economic commentator Phil Ruthven, saving for the goods they want, rather than racking up credit card debt and personal loans.
"I think we will begin to see some more financial sanity emerging," Ruthven says of emerging consumers.
"The [net generation isn't] terrified of debt to the extent our parents and grandparents might have been, saving up for everything," he says.
"We're not going to move back that far - but I think the net generation are likely to be much more prudent and savvy with their finances."
This will be in reaction to witnessing debt cause stress among family and friends, but also part of the personality of this particular generation.
"The net generation is a 'civics' generation, which comes around every four generations," Ruthven says. "You could describe it as a little less materialistic - they see material things as a means to an end, rather than an end in themselves."
Social researcher Mark McCrindle, of McCrindle Research, says generation Y - teenagers to those aged in their mid-20s - has grown up with credit cards and never known a recession, so this age group tends to have high consumer expectations.
"But there's light at the end of the tunnel," he says. "They are the most materially endowed generation ever but they've found that doesn't satisfy them - that there's got to be something more. So there's a 'live slow' movement, a 'buy slow' movement - there's some little glimpse of what might change."
For now, financial advisers say that even clients on good incomes are experiencing stress over the level of their borrowing. It may not be enough to tip them over the edge financially but they are nevertheless feeling less than comfortable.
In lower-income communities, debt counsellors are seriously concerned about the prospect of an interest rate rise in coming months and outright dismayed by speculation there could two to three rate rises in the next 12 months.
Trading on the bond market indicates that an official rate rise of a quarter of a percentage point is an even bet for August and a certainty by November, with another rise priced into bonds for the first half of next year.
Rory Robertson, an interest rate analyst at Macquarie Bank, says the Australian Bureau of Statistics's inflation report, due out on July 25, will "make or break" the case for a rate rise as early as August.
By his reckoning, if the consumer price index trend figure is above 0.5 per cent, the Reserve Bank will act.
Advisers say such circumstances make it more important than ever to go back to the basics: budgeting, saving, and being disciplined about repaying any debts.
"The two words I use are planning and discipline," says Laura Menschik, the managing director of WLM Financial Services.
"People have to understand the difference between buying something right now and doing it a bit later, when they've been disciplined and saved for it - or even going without because they may not need it."
Menschik rolls off some examples: if you use the redraw facility on your mortgage to buy things, be disciplined about repaying that money over a couple of years rather than 25 years; leave a buffer for unexpected events such as the car breaking down or your roof blowing off; pay more than the bare minimum on your cards and loans.
And think about cutting up your cards. Menschik isn't alone in seeing people set about getting their finances in order - often by consolidating their debts in their mortgage or a personal loan at a lower rate - only to fall off the wagon and run their credit cards up again.
Karen Cox, the co-ordinator of the NSW Consumer Credit Legal Centre, says people don't always address the underlying problem that got them into debt in the first place, "which is that they're just living beyond their means".
"I don't say that in a judgemental way - I know a lot of people are struggling just to meet everyday expenses," Cox says. "But having debt doesn't help. It just makes it worse."
Financial planner Suzanne Baldry, of Baldry Financial Group, says a budget should be the foundation of any financial strategy.
Budgets might be considered boring and old-hat, but they work, she says - as long as they're the right way round.
"You've got to work out what your commitments are before you work out what you're going to spend - not the other way around," she says.
"It's not a case of 'what have I got left over for my debt repayments'."
Lisa Armstrong, the head of consumer advocacy for mortgage broker Resi, says people tend to fall back into old patterns if they don't change something about their spending behaviour.
She suggests reducing the limits on your credit cards - and resisting offers to move them higher. You should be able to pay off your card debt every month, she says.
Even better, switch to a debit card that has the convenience of a credit card but uses your own money.
Heaven forbid, you might even consider using cash again.
"It's just not an emotional transaction when you hand over a card - it has no meaning to us," Armstrong says. "But when you hand over your hard-earned cash, out of your wallet, you can see what [that purchase] has just cost you."
Money asked the experts to tell us what works and what doesn't when it comes to modern-day debt.
Mortgage redraw
Rather than running up credit card debt at interest rates of 16 or 17 per cent, many people now use their mortgages to fund consumption - a practice that financial planner Suzanne Baldry says is turning mortgages into "residential ATMs".
People draw on the equity in their home, or redraw extra payments they've already made, for spending such as renovations, holidays, clothes, cars and flat-screen TVs.
Alternatively, they consolidate more expensive debts by rolling them into their mortgage.
Baldry says this is fine so long as you're disciplined about repaying that money quickly, rather than spreading it over 25 or so years.
"Not increasing payments to cover this is bad news," she says.
Denis Orrock, of researcher InfoChoice, agrees. He says that doing so spreads a debt that would normally be paid off in three or five years across two decades, adding thousands of dollars in interest charges despite the lower rate (see table, above right).
"Putting debt into the mortgage is a great idea, but you have to pay more," says Lisa Montgomery of Resi.
"You have to pay a lot like you were paying before [when the debt was on your credit cards]."
Personal loans
Orrock says personal loans may be more costly than home loans but they have the advantage of instilling discipline in borrowers.
"Some people do need the discipline of a certain payment every month for a set period to pay things off," he says. "There's a lot to be said for that."
St George Bank's head of consumer lending, Ed Box, says personal loans are much more flexible these days - they can be fixed or variable rate, and some now allow early repayments. He advises tailoring your personal loan to suit your circumstances - for instance, by having the repayment periods set weekly, fortnightly or monthly, in line with when you receive your pay.
Credit cards
A lower rate may not mean you're better off when it comes to credit cards. The consumer group Choice says whether you're better off will depend on the way the interest on overdue amounts is calculated.
You could be worse off if the card charges daily interest on the full, original purchase amount even if some of the balance was repaid on time, or if interest is charged right back to the original purchase date rather than from due date or statement date. Also, you might lose your interest-free period for new purchases if any debt is carried over from the previous month.
Interest-free deals
It's tempting to take advantage of "buy now, pay later" deals but Karen Cox says the Consumer Credit Legal Centre sees a lot of people struggling with very-high-interest debt that started out as interest-free debt. Sometimes no repayments are required at all for the interest-free period, and people take the optimistic view that they'll be able to pay for the goods after the one-, two-or even four-year period.
But that may not happen, or their circumstances may even be worse, Cox says, and the debt ticks over onto a very high rate of interest.
"Others require regular repayments but the repayment you're told to make is based on the standard minimum credit card payment and has nothing to do with paying it off in the interest-free period," she says. "People think they're paying it off but they're actually not. You make a fairly small hole in it on some of them."
Retailer David Jones provides two figures for interest-free options when it sends out its monthly store card statement: the minimum payment due and the amount "payable to minimise further interest charges".
The minimum payment is lower than the amount that would "minimise" interest charges.
Cox says some lenders don't even provide this level of information.
For all those reasons, consumers should think twice before flashing their plastic.
Source: Sydney Morning Herald
Monday, July 09, 2007
Debt reduction, not credit card rates from banks are the big concern
Credit card rates are the least of Australians' concerns when it comes to managing their personal finances, a survey has found.
Despite the four biggest banks increasing credit card interest rates this year, the factor was on the bottom of the list when respondents ranked their 10 most important money matters in a national survey by NEWS.com.au and polling firm Coredata.
The most important considerations were reducing debts (85 per cent of respondents), planning for retirement (75 per cent) and superannuation (74 per cent), the June survey of 1830 people found.
Only 53 per cent considered credit card rates important.
Anne-Marie Esler, technical research manager with financial advisors Centric Wealth, said while it was surprising credit card rates were a low priority it was encouraging debt reduction was high on the list.
“Personal debt includes amounts owing on credit cards, so hopefully people have considered paying these off in order to help improve their financial situation,” she said.
Interest in investments
Three quarters of those polled believed investments were important, with property being the most popular option (59 per cent), followed by the stock market (53 per cent) and managed funds (42 per cent).
Finance websites, including business news sites and information sites, were the main sources of investment information, followed by newspapers, banks, then family and friends.
Getting advice
Of those who sought advice from banks, less than half - 46 per cent - were satisfied with the information they received. Mortgage brokers fared worse, with just 44 per cent satisfied with their advice.
This compared to 78 per cent of respondents who were satisfied with information they got from websites.
“This result suggests people need to take more time in considering who is in the best position to guide them financially,” Ms Elser said.
Half the respondents said they occasionally sought professional advice on money management while 31 per cent had never done so.
Those with higher incomes were more likely to seek advice.
Retirement
When it came to planning for retirement, 60 per cent of young respondents aged 29 and below said it was important.
“This is a surprising result. It is great to see that so many people under 29 years are contemplating their retirement savings,” Ms Esler said.
“Hopefully these people will also be taking action by having a savings plan either inside super by way of salary sacrifice or taking advantage of the Government’s co-contribution, or outside super through share, managed funds or property investments.”
Those aged 40-49 placed the most importance on a retirement plan (91 per cent), followed by the 50-59 age group (89 per cent).
Despite the four biggest banks increasing credit card interest rates this year, the factor was on the bottom of the list when respondents ranked their 10 most important money matters in a national survey by NEWS.com.au and polling firm Coredata.
The most important considerations were reducing debts (85 per cent of respondents), planning for retirement (75 per cent) and superannuation (74 per cent), the June survey of 1830 people found.
Only 53 per cent considered credit card rates important.
Anne-Marie Esler, technical research manager with financial advisors Centric Wealth, said while it was surprising credit card rates were a low priority it was encouraging debt reduction was high on the list.
“Personal debt includes amounts owing on credit cards, so hopefully people have considered paying these off in order to help improve their financial situation,” she said.
Interest in investments
Three quarters of those polled believed investments were important, with property being the most popular option (59 per cent), followed by the stock market (53 per cent) and managed funds (42 per cent).
Finance websites, including business news sites and information sites, were the main sources of investment information, followed by newspapers, banks, then family and friends.
Getting advice
Of those who sought advice from banks, less than half - 46 per cent - were satisfied with the information they received. Mortgage brokers fared worse, with just 44 per cent satisfied with their advice.
This compared to 78 per cent of respondents who were satisfied with information they got from websites.
“This result suggests people need to take more time in considering who is in the best position to guide them financially,” Ms Elser said.
Half the respondents said they occasionally sought professional advice on money management while 31 per cent had never done so.
Those with higher incomes were more likely to seek advice.
Retirement
When it came to planning for retirement, 60 per cent of young respondents aged 29 and below said it was important.
“This is a surprising result. It is great to see that so many people under 29 years are contemplating their retirement savings,” Ms Esler said.
“Hopefully these people will also be taking action by having a savings plan either inside super by way of salary sacrifice or taking advantage of the Government’s co-contribution, or outside super through share, managed funds or property investments.”
Those aged 40-49 placed the most importance on a retirement plan (91 per cent), followed by the 50-59 age group (89 per cent).
Saturday, July 07, 2007
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
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
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