FINANCIAL ADVICE: We pride ourselves on honesty, so we thought we’d share this with you!
(Note: In this blog I use the word “bank” to refer to any financial institution that lends money & charges interest).
The Banks are laughing all the way to the…well, er, Bank! Why? Because;
- Australian household debt is massive – $1.84 trillion and counting* – with more credit often only a few clicks away, and;
- Outrageous interest rates are generating them massive revenue.
And the impact of the “convenience” of money on tap? A dramatic increase in personal insolvencies in The Hunter region in 2014. See the Newcastle Herald article here.
I know of a single man with no assets (besides his super), who has been able to run up over $100,000 in credit card debt. It’s clear, if you have a decent and consistent income you can get credit if you want it – they rarely say no and will advertise for more of your business once they’ve got you.
Here are three things that lenders do that can keep you on the debt treadmill:
Market to attract and trap the “Revolvers” (see below for definition)
Offer Interest Free deals that actually give you a new live credit card
Offer Finance that is not daily reducible
THE BANKS SAY: “Revolvers”, let them shoot themselves in the foot.
A “Revolver” is the term the Banks give a person who perpetually has an outstanding balance on their credit card. The outstanding balance attracts a huge interest rate (I have seen 22%, the Official Cash Rate is only 2.25%).
As that balance owing grows it can be a hard habit to break. The minimum monthly re-payment they ask you to pay means it will take years to repay the card in full (earning them a tidy sum along the way). The kicker is, the amount you choose to pay off is available for you to spend next month!
It’s easy to see why they offer credit card re-financing with an interest free period. They are banking on you failing on your new commitment and falling into old habits. (Also, if you do fall off the wagon by purchasing more on the card, your future payments could be going off new purchases first, meaning that your strategy of re-paying all of the re-finance amount by the end of interest free period is out the window.)
WE SAY: Put the card away (or cut it up) and stick to a repayment that as is affordable and will repay the card in an achievable time frame.
THE BANKS SAY: Here, have it now – and forever!
It has to be the fastest growing form of credit – in-store offers of “interest free” payment terms, take it now and pay later. The finance providers hope it is much later!
It is not usually the Store providing the credit and in a lot of cases, you are actually applying for a new credit card – with a credit limit that does not necessarily match the amount of your original purchase (meaning they give you more to spend, earning themselves more interest)!!
Again, the financiers hope is that you fail to repay the full amount in the interest free period. Once the original purchase is repaid, you have a card that can be used like any other credit card.
WE SAY: Save the cash before you buy, the purchase is guilt free and much more satisfying. Or, put the card away and close the account after you have repaid the loan.
THE BANK SAYS: Repay as early as you like – makes no difference to us!
It makes no difference to you either –in terms of how much the financed purchase actually ends up costing you.
This one is popular in motor vehicle finance, where the finance provided is not “daily reducible”. What happens is that the interest to be paid over your selected loan term is added on at the start so that extra payments made make no difference to the amount of interest you end up paying.
Sure you can make extra payments and sure, this will mean you repay early – but you don’t actually save any money because the amount of interest you pay is not calculated every day on a reduced balance.
WE SAY: Know your credit contract, ask to be shown where it says that loan interest is calculated on the outstanding balance on a daily basis. Or, of course, save up before you buy and pay cash.
There are numerous strategies available to help you remain out of debt or to get out of the debt cycle. Ask your Financial Planner for help today!
*Source:ABS – 4102.0 – Australian Social Trends, 2014 – http://www.abs.gov.au/ausstats/abs@.nsf/lookup/4102.0main+features202014