Plastic meltdown hits the pocket
Nicola Howell
10feb05
The New Year began for many with resolutions to take more care with household finances. However, those January resolutions often are overshadowed by the arrival of credit card statements reflecting our Christmas/New Year spending.
And to make matters worse, many families trot out the credit cards again to cover back-to-school costs. The arrival of the February statement can compound the financial shock.
So the plastic may be fantastic, but for some of us, the New Year will start with a financial hangover.
Credit cards have become integral in the financial arrangements of many households. According to the latest Reserve Bank figures, we owe more than $28.6 billion on credit and charge cards, $3 billion more than we owed a year earlier.
How did this happen?
We shouldn't really be surprised about our love affair with credit cards. They are convenient. Accepted almost everywhere, they remove the need to withdraw large sums of cash from an ATM or bank.
Credit card issuers have been keen for us to change our transaction habits. We're told to pay by credit card to avoid transaction fees, there are plans to "cut years off mortgages" and we are urged to pay all our living expenses by credit card.
Sophisticated frequent flyer and reward programs, promotions and competitions also encourage credit card use.
For some transactions, discount air fares for example, credit cards are the only payment option.
And, of course, the opportunity to "buy now, pay later" is incredibly seductive.
So the fact that credit card balances are rising should not really come as a shock.
Does it really matter?
Research in 2002 suggested that 64 per cent of households using credit cards did not pay any interest. For these people, credit cards are more likely to be a blessing than a burden. But what about the other one-third of households?
Credit cards are expensive. Interest rates can be around 15 to 20 per cent, and even higher for store cards. Failing to pay the entire monthly balance often can mean that interest is charged on the whole amount, not just the unpaid balance.
And paying only the minimum monthly balance certainly won't be a hangover cure. The Australian Consumers' Association has calculated that repaying a $1000 credit card debt with just the minimum monthly payments (and any fees and charges) would cost $3000 and take nearly 20 years.
Credit, debt and overcommitment can lead to financial hardship and the inability to afford essentials. It also can have adverse effects on relationships and mental health.
We need to reverse the trends and reduce the harm that can be caused by credit card debts. How?
First, we could do more to help consumers understand the true cost of credit cards. In Britain, policy makers are considering warnings about the costs of paying only the minimum monthly balance. Australia could look at something like a personalised warning on statements:
"Your balance is $1000. The minimum payment you must make is $20. If you make no more purchases with this card, but pay only the minimum payment each month, you will repay the debt in approximately 20 years."
Second, card issuers should be required to check a person's financial position when they offer an increased limit. This already is the case in the ACT, but other jurisdictions have not yet caught up.
Credit card providers should market cards responsibly, ensuring marketing messages are consistent with educational messages about responsible use.
Finally, more advice is needed for people already overwhelmed by credit card debts. The demand for free and independent financial counselling services in Queensland is high, but the resources are not there to meet the demand.
There is no doubt that credit cards are a useful and convenient payment mechanism. But at what cost? Maybe it is time for credit providers, policy makers and consumer advocates to be making New Year's resolutions to reduce the risk of consumers suffering credit card hangovers in 2005.
• Nicola Howell is director of Griffith University's Centre for Credit and Consumer Law, funded by the Queensland Government's Consumer Credit Fund and the university.
Nicola Howell
10feb05
The New Year began for many with resolutions to take more care with household finances. However, those January resolutions often are overshadowed by the arrival of credit card statements reflecting our Christmas/New Year spending.
And to make matters worse, many families trot out the credit cards again to cover back-to-school costs. The arrival of the February statement can compound the financial shock.
So the plastic may be fantastic, but for some of us, the New Year will start with a financial hangover.
Credit cards have become integral in the financial arrangements of many households. According to the latest Reserve Bank figures, we owe more than $28.6 billion on credit and charge cards, $3 billion more than we owed a year earlier.
How did this happen?
We shouldn't really be surprised about our love affair with credit cards. They are convenient. Accepted almost everywhere, they remove the need to withdraw large sums of cash from an ATM or bank.
Credit card issuers have been keen for us to change our transaction habits. We're told to pay by credit card to avoid transaction fees, there are plans to "cut years off mortgages" and we are urged to pay all our living expenses by credit card.
Sophisticated frequent flyer and reward programs, promotions and competitions also encourage credit card use.
For some transactions, discount air fares for example, credit cards are the only payment option.
And, of course, the opportunity to "buy now, pay later" is incredibly seductive.
So the fact that credit card balances are rising should not really come as a shock.
Does it really matter?
Research in 2002 suggested that 64 per cent of households using credit cards did not pay any interest. For these people, credit cards are more likely to be a blessing than a burden. But what about the other one-third of households?
Credit cards are expensive. Interest rates can be around 15 to 20 per cent, and even higher for store cards. Failing to pay the entire monthly balance often can mean that interest is charged on the whole amount, not just the unpaid balance.
And paying only the minimum monthly balance certainly won't be a hangover cure. The Australian Consumers' Association has calculated that repaying a $1000 credit card debt with just the minimum monthly payments (and any fees and charges) would cost $3000 and take nearly 20 years.
Credit, debt and overcommitment can lead to financial hardship and the inability to afford essentials. It also can have adverse effects on relationships and mental health.
We need to reverse the trends and reduce the harm that can be caused by credit card debts. How?
First, we could do more to help consumers understand the true cost of credit cards. In Britain, policy makers are considering warnings about the costs of paying only the minimum monthly balance. Australia could look at something like a personalised warning on statements:
"Your balance is $1000. The minimum payment you must make is $20. If you make no more purchases with this card, but pay only the minimum payment each month, you will repay the debt in approximately 20 years."
Second, card issuers should be required to check a person's financial position when they offer an increased limit. This already is the case in the ACT, but other jurisdictions have not yet caught up.
Credit card providers should market cards responsibly, ensuring marketing messages are consistent with educational messages about responsible use.
Finally, more advice is needed for people already overwhelmed by credit card debts. The demand for free and independent financial counselling services in Queensland is high, but the resources are not there to meet the demand.
There is no doubt that credit cards are a useful and convenient payment mechanism. But at what cost? Maybe it is time for credit providers, policy makers and consumer advocates to be making New Year's resolutions to reduce the risk of consumers suffering credit card hangovers in 2005.
• Nicola Howell is director of Griffith University's Centre for Credit and Consumer Law, funded by the Queensland Government's Consumer Credit Fund and the university.
