Christmas Credit A Feast For Banks

Newcastle Herald

Thursday December 20, 2007

Noel Whittaker

THIS is the time of the year when the credit cards get a workout, so it's appropriate to spend a few minutes reminding ourselves of some of the ways that credit cards can bite.

And bite they can unfortunately, what started as a tool for making shopping easier has now mushroomed into a fee feast for the banks.

There are two types of credit cards those that offer an interest-free period, and those that don't. Now the interest-free period might sound fine, but remember you are only eligible for it if you pay the entire balance before the due date.

Even if you pay most of it, they will still charge you interest on the whole lot if you are even $1 short. The solution is obvious unless you pay the card off each month, it is pointless wasting money on cards that offer an interest-free period.

To make it worse, these cards usually have the highest interest rates on the outstanding balance.

The techniques used by the banks are beyond belief. Suppose you owed $5000 on your credit card for purchases, and then withdrew $200 as a cash advance because you were caught short.

If you deposited $200 into the card the next day, it would be reasonable to expect that it would be treated as a repayment of the cash advance.

Not so! It will be treated as part payment for the purchases so they can still charge you interest on the cash advance, which of course is payable from the date you draw it.

Beware of low interest rates to get you in. A friend thought he could save money by refinancing a 12 per cent personal loan through a credit card that was offering an introductory rate of just 4 per cent on balances transferred to it. He continued to use the credit card to book up his business expenses and charged up over $30,000 in the first month.

Of course he made sure the purchases were paid before the due date, but to his horror discovered the bank used that $30,000 payment to wipe out the transferred loan he was left paying 18 per cent on that transferred debt.

At work we encourage our younger staff members to avoid credit cards wherever possible and use a Visa Debit card in lieu.

That seemed a good strategy because when you use a debit card, the withdrawals are limited to the amount you have in the bank account. One of our young blokes checked into a hotel and, as is normal, the hotel took an imprint of his card as a buffer against any purchases he might make.

It was a few days before payday and he only had $220 in his bank account the action of the hotel meant there was a potential stop of $200 on the account. This reduced his available funds to just $20. He settled his account when he left the hotel and asked for the $200 stop to be removed. This took the bank five working days which meant he had just $20 to live on until payday.

In another incident the bank made the normal mortgage repayment the day before the hotel put a notional stop of $200 on the account. The bank claimed the account was now overdrawn and charged a $50 overdrawn fee.

I was caught in London recently when trying to avoid the $15 fee the bank charges for foreign currency cash advances. Before I left Australia I made sure the credit card account was $5000 in credit so I would be able to withdraw cash on it and thus get around the fee. Guess what? The bank still charged the fee. Their explanation our credit card doesn't work like that.

Although the fees charged by the banks might be bad, the worst aspect of it all is the way these seemingly tiny sums add up.

Every month, when the credit card statements arrive, we are stunned at the way those seemingly insignificant amounts accumulate to several thousands of dollars. Consider easing back on your spending this Christmas it may well mean you avoid nasty shocks come January.

A Merry Christmas to you all from the Whittaker household (including Simba the Ridgeback).

Noel Whittaker is a director of Whittaker Macnaught, a division of HBOS Australia. Readers should seek their own expert advice before making financial decisions. His email is noelwhit@gil.com.au