Credit May Push You To The Limit

Newcastle Herald

Thursday December 22, 2005

Noel Whittaker

THIS is the time when most Australians give their credit cards a work-out as the retailers compete to lure them into debt.

I've written before about the dangers of credit cards because spending with them feels very different to spending with cash. It's a big call to take a $100 note out of your pocket and hand it over. There's much less pain when you simply watch your credit card being swiped through a machine.

The pain comes four weeks later when the credit card statement arrives, and you discover to your horror how a multitude of relatively tiny transactions can add up to an impossibly big sum.

Naturally the banks have jumped on the gravy train and have thought up a couple of nasty traps for anybody using credit cards. One reader wrote: "If you reach your limit, the card is supposed to be declined if you try to use it.

"Recently I had two incidents where my card limit had been exceeded and I was charged an over-limit fee each time. Once by Westpac and once by Citibank.

"In each case I knew I was getting close to my limit, but, as the transaction went through, I thought I must have had some credit left.

"What both banks had done was establish a 10 per cent leeway over my limit. So the statement said my limit was $5000, but they were prepared to let it go to $5500. The catch is they hit me with $20 and $30 over-the-limit fees.

"When I questioned them I was told: 'We do this to save you embarrassment'. I challenged both fees and successfully got them reversed.

"I cannot believe how sneaky, deceptive and dishonest this practice is. How dare they allow this de facto increase in your limit and then slug you with a fee for it? I know they can't increase your limit without your OK but this is a back-door way of doing it without your signature."

Yes, it is sneaky and deceptive, but the tricks they use to get you when you're paying your bill are even worse. I am a substantial spender on credit cards because we put our business expenses on them to accumulate reward points.

This month, the St George Bank Visa statement arrived with a balance of $7677 with the notation minimum payment due $154. The Citibank statement had even less information. The balance was $20,344, but the total payment due was just $567. On the American Express card, balance $6197, the amount payable was $185.

Certainly the statements showed the interest rate clearly, but nowhere did they disclose that anybody who was naive enough to pay only the amount payable would be hit with interest at high rates from the date of the transaction.

Take the St George Visa card for example. It carries an interest rate of 18.24 per cent, which means anyone making the requested payment of $154 on a balance of $7677 would take seven years to pay off the debt and incur interest of $6795. And that would only happen if there were no further transactions billed to that card for the following seven years.

The one institution that did it properly was David Jones. Of course the discount is always welcome and on a balance of $848 their minimum payment was $16.97.

However, they did state that the entire balance had to be paid to minimise future interest charges.

One of the worst aspects of these misleading practices by banks is that they hit the most vulnerable.

The financially aware know of these practices, make sure they don't overspend, and pay the entire balance when the statement arrives.

It's the financially illiterate who will end up paying for this Christmas for the next seven years.

Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL Number 246519. Email noelwhit@gil.com.au. This advice is general and readers should seek their own expert financial advice.

© 2005 Newcastle Herald

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