Credit card fees and charges. The Age. Melbourne 11th May 2005Be careful, very careful, when it comes to cheap deals on plastic, reports Michelle Innis.Intense competition among Australia's credit card issuers means some have dropped the interest rate they charge on balance transfers to zero for six months.
"Looking for home mortgage finance? Try Mr Mortgage first for 100 percent home loans, 95 percent mortgage refinancing with debt consolidation and 95% lo doc mortgage loans and bad credit mortgages now." Home Apply for a home loan Apply for a car loan It's a seductive offer: if you have a big debt on a credit card, you can move it to a new credit card and pay no interest on the existing debt for a limited period. But, unsurprisingly, all is not quite as it seems. Consumers should be aware how, rather than solve their debt problems, the credit cards can significantly add to them. For a start, all the credit cards revert to a higher interest rate after the "honeymoon" period and some impose draconian penalty fees for late payments, or a breach of your spending limit. Also, new purchases are charged at either the "revert", or another higher rate, from day one, adding to the complexity. Significantly, most credit card issuers ensure that the "zero interest rate debt", or balance transfer debt, is paid off first. This leaves new purchases to incur hefty interest costs. This is because monthly payments are applied only to the balance transfer, until it is cleared, leaving the new transactions to clock up interest over a longer period, and at a higher rate. So rather than help the situation, such credit cards can exacerbate things. (HSBC is an exception to this rule. It allows its credit card holders to pay off the most expensive debt first on their credit card debt.) Such credit cards work well for people who use them to pay off the balance transfer entirely before using their cards again. Even then, it is important to check on the revert rate which may be as low 9.99 per cent at Aussie Home Loans or as high as 16.99 per cent at BankWest. Similarly, consumers who make only minimum repayments are asking for trouble. Credit counsellors say very low minimum repayment requirements, some at 2 per cent, make paying off a card almost impossible. They are also concerned that the proliferation of "zero interest" offers significantly increase the overall debt burdens consumers face. Researchers in the US have found that if consumers avoided "incurring excessive debts they would be better off - but firms promoting remedies would not". A "remedy", such as a new credit card that allows you to pay your existing debt off at a lower interest rate, reassures consumers that high debt levels are not a major concern, say three professors in a paper published by the Wharton School of the University of Pennsylvania. "Consumers seize upon the 'remedy' and reason that it reduces the perceived risk and gives license to further risky behaviour. What's needed is for consumers to be more savvy and for government regulators to pay more attention to remedy advertisers and the claims they are making," their paper states. "Generally, low balance transfer deals are designed to capture those people who don't pay their balance off," says Carolyn Bond, the manager of Victoria's Consumer Credit Legal Service. "There is about $30 billion owing on credit cards in Australia. About two-thirds of that is interest-bearing, and that debt is held by about one-third of credit card customers. "The industry is chasing those customers," she says. Bond says very small minimum repayments mean people acquire more and more debt, and the smaller the repayment, the more profitable the card is for the card issuer. Steve Worthington, a professor at the Faculty of Business and Economics at Monash University, says: "You have to look very carefully at the terms and conditions on these cards. "Balance transfers at low rates can be attractive. But they build debt and they suit the card-issuer." Worthington says the sudden growth in cards that offer a zero, or very low, interest-rate on balance transfers reflects the fragmentation of the Australian credit card market. These offers have been popular in the US and Britain for some time, he says. In Australia, what lies behind the marketing ploy of zero interest is a bid to "capture cardholders who then run as big a balance on their cards as possible". GE Money Direct's managing director, Mike Cutter, says the new GE Low Rate MasterCard is aimed at people who don't pay off their credit card debt each month. The GE low rate card offers a zero interest rate on balance transfers for the first six months. After that, the rate reverts to 10.99 per cent. Any new purchases made with the card attract interest at 10.99 per cent immediately. "We want people to use this card for their everyday purchases," Cutter says. "We want it to be the only card they have in their wallets." It has an annual fee of $58, a penalty fee of $30 if you don't make a payment on time, and a fee of $25 if you breach your spending limit. (GE also offers a MasterCard with a 20.50 per cent interest rate. It is offered to people who "may not have a regular income", Cutter says, or those who might not be able to get a credit card from a bank. It comes with a special offer of a balance transfer rate of 9.9 per cent for six months, after which it reverts to 20.50 per cent.) The Aussie Home Loans card has a balance transfer rate of 3.99 per cent for six months. The rate reverts to 9.99 per cent. But it has a late fee of $35 and an over-the-limit fee of $35. "If you don't pay [something off] your card, then you will get a letter from us saying shape up or ship out," Aussie Home Loans' managing director, John Symond, says. "Not everyone is going to get a card from Aussie. With the rate at 9.99 per cent, we don't have a lot of room to move. People who need a lot of time to make a payment should go elsewhere." Worthington says competition in the card market and greater choice for Australian card customers is good. But he says consumers need to be on their guard. "Cards are enormously profitable for the issuer, as long as they don't fall into the bad debt category," he says. Bond says: "If you're carrying a large balance, ask yourself why you have that debt, before you transfer it to another card. "Transferring your debt may just delay you making a hard decision about your spending patterns and debt. It's better to face up to that and change bad habits," she says. | 
