Credit Card Costs and Interest Free Loans - Smart Money Newsletter Feb 2003

The monthly newsletter of
Sheila Freeman Consulting

Issue 5, Febraury 2003

In this Issue:

From our Quote Collection:

"Be true to your work, your word, and your friend." -Henry David Thoreau

"Vacations may put you in the pink but probably leave you in the red. " -W.G.P.

"You must do the things you think you cannot do." -Eleanor Roosevelt

"Never be bullied into silence. Never allow yourself to be made a victim. Accept no one's definition of your life; define yourself." -Harvey Fierstein

Welcome to our February's issue of "Smart Money".

In this month's newsletter:

a follow-up to the issue of businesses passing on credit card charges to their customers (you!).
a brief look at potential price rises on the horizon,
what to be aware of if you are offered an "interest free deal".
practical hints on caring for those expensive portable items: mobile phones and laptop computers.

Warm regards

Sheila Freeman

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More on Credit Card Costs - Another Consumer Rip-Off?

From 1 January 2003, as a result of recent reforms introduced by the Reserve Bank, merchants such as shop keepers, trades people, utility and other providers have had the right to charge a fee for accepting payment by credit card. Previously merchants had to pay their bank for each credit card payment but were unable to recover the cost from consumers who pay by way of credit card. (This fee varies between banks but is usually between 2 and 5 per cent.)

Those most affected will be the people who operate their mortgage as a home equity loan. (A Home Equity Loan is when all your income is deposited onto your mortgage and all purchases are bought on the credit card, which is paid out at the end of the month.) Paying an extra 4 per cent to use a credit card will mean that the interest rate on the home loan will increase by this percentage; this also means interest is incurred even if the card is paid out before the due date.

I sent the above text as part of a media release in December 2002. During my research I spoke with a representative of the Reserve Bank who assured me that it was most unlikely that Australian traders would impose this fee, despite fees being imposed in similar circumstances overseas. I disagreed, stating they were allowing traders to impose this fee (at their discretion) with no protection for the consumer.

Well, it appears I have been proven right. The headline in The Sunday Age on February 9, 2003, read: ‘Credit card charges to take off when Qantas lifts booking fee.’ The article stated: ‘It will be a flat nominal surcharge for credit card transactions. We’ve not determined how much’.

The article also mentioned that Virgin Blue was also looking at the issue. “A decision has not yet been reached…”We are going to watch and see how the industry reacts.”

Remember – Whenever you consider paying by credit card, ask if a fee is imposed for credit card payments and, if so, ask the amount of that fee. You can then make an informed decision as to your method of payment. You should also ask if there is a discount for cash.

Be Prepared for Price Rises

The drought, the potential war with Iraq will have an impact on all of us.

Because of ruined crops and loss of stock, the price of fruit, vegetables and meat will rise; because of uncertainty regarding the looming war, oil prices will stay higher and we are almost certain to be paying above $1 per litre all the time during the coming months.

It has been recommended that you fill your car on Wednesday or Thursday, as it has become a fact of life that the price of petrol increases Fridays just in time for the weekend. The weekend prices in Victoria are now in excess of $1.00. It has just been released that we will be paying $1.10 - $1.15 by the middle of March.

Beware of Interest Free Deals

You see or hear these promotions all the time -

'Buy now, pay later!’

‘Interest free for 12 months...'

– usually available for high-price items such as a lounge suite, bedroom furniture, refrigerator, car and so on. They appear to be a great opportunity to buy something you want now rather than saving for it first.

Unfortunately, such credit offers can be debt traps. They are similar to a personal loan and, when payment is due, you may have to pay the money upfront or within a specified time. If you don't, you incur excessive interest penalties, often around 27 to 28 per cent up to as high as 38 per cent, and sometimes these interest charges are backdated to the actual purchase date.

Consumers are warned to read such loan contracts in full before buying. Although some of these credit arrangements are provided in-house by retailers, often the loans are outsourced to finance companies; thus, the purchaser is really entering a contract with a finance company, not the retailer.

These promotions can be good deals for disciplined people who are able to take advantage of the interest-free period, but unfortunately are most appealing to, and have the highest risk for, the people who can least afford them, i.e. low-income earners.

Never enter into this type of agreement unless you are certain that you can cover the repayment in full when it is due. Otherwise, the high interest incurred could result in financial disaster.

If you do buy goods on interest free terms, divide the total price by the number of months and ensure you pay that as a minimum payment each month. E.g. $2000.00 divided by 24 months = $ 83.34 per month.

Keeping mobile phones and laptop computers safe

These days, there are many families in which each member has a mobile phone, laptop computer, or both. Some secondary schools insist that their students use laptops for all schoolwork, so that the computers are transported between schools and homes every day.

Thieves regularly target these valuable items, with approximately 100,000 mobile phones being stolen annually in Australia, and about 13,000 laptops stolen in NSW alone in 2001. The following common sense security measures may help to keep these expensive possessions safe:

Mobile phones:

Don’t leave your mobile phone in full view in your car.
Keep your phone in your pocket or bag; don’t display it obviously in crowded or insecure places.
Ensure it has a PIN so that no one else can use it if it does get lost or misplaced.
Record the serial number of your phone in a safe place (if it is lost or stolen it can be identified by the number).
Contact your service provider and the police immediately if your phone is lost or stolen.
Insure* your mobile phone.

Laptops:

Don’t leave your laptop in your car; if you have to, place it under the seat, in the boot, or anywhere it can’t be seen through the windows.
Don’t ever leave your laptop unattended; if this cannot be avoided, secure the laptop to a fixed object with a security cable (available from most computer stores) or fit it with an anti-theft system.
Engrave your laptop with your personal details or other method of identity, such as your car registration number.
Hide the fact that you have a laptop by carrying it in your schoolbag, backpack or briefcase rather than an obvious laptop case.
Remember to back up the data on your computer; laptops are costly to replace, but the data in the computer can be lost forever.
Insure* your laptop.

* You may be able to extend your home and contents policy to include particular objects taken outside the home, or you may be able to insure your mobile phone and laptop under a ‘special valuables’ or ‘personal effects’ cover. Contact your insurance company for information and advice.

Disclaimer

Every effort has been made to ensure that the information on this newsletter is accurate. However, the information is not intended as professional advice and the authors shall have neither liability nor responsibility to any person or entity with respect to any loss or damages arising from the information contained in this newsletter.

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