Banks are still laying credit card traps for the unwary

TRAP: Any credit card issuer doing the right thing by their customers would not even contemplate enticing them into long term debt at high rates of interest.
TRAP: Any credit card issuer doing the right thing by their customers would not even contemplate enticing them into long term debt at high rates of interest.

The banks are still in the spotlight. Just last week, ANZ chairman David Gonski announced that a full review of the bank's culture taken over the last few months had discovered three major challenges:

  • the bank is more focused on short-term fixes than long-term solutions,
  • the staff are frightened to speak up, and
  • the bank is not customer-focused.

That's hardly rocket science - most of us could have come to that conclusion in less than 60 seconds.

But despite all the mea culpas from the banks, and promises to do better, I wonder if any of them are sincere.

My wife and I have Virgin Visa credit cards, which are issued by Citibank. The reason we have two cards is because Virgin have now limited Velocity Frequent Flyer points to 10,000 per card per month. As we pay the bulk of our business expenses by Visa card, and most merchants won't accept Amex, we maximise our points by using both cards when expenses, which include rates and land tax, exceed $10,000 a month.

We pay all our cards before the due date to save paying any interest. Just recently, Citibank/Virgin have started to bombard my wife with offers to extend the debt, instead of paying it. The balance at statement date last month was $825.52, and soon after receiving the statement she received a text message from Citibank: "Convert $825.52 from your last statement balance into fixed monthly instalments at 14.99% per annum for up to 60 months."

This extraordinary action begs the question as to why Citibank would offer someone who had never missed a payment the opportunity to pay off the measly sum of $825.52 over five years at a usurious rate of interest. Furthermore, the offer was sent only to my wife and not to me. One wonders if this because she is female, and the card has a lower limit.

All credit card statements are now required to show in bold type how long it would take to pay off the balance of the card if the cardholder paid only the minimum amount required each month. It seems to vary from between 17 years and 27 years depending on the rate and the minimum payment of that card issuer. They are also required to state what monthly payment would be required to pay the card back in two years, and how much that would save in interest.

The text, however, failed to mention that anybody who took up their offer of five years at 14.99% would pay back a total of $1200, which is 40% more than the balance owing today.

There were suggestions during the Royal Commission that ASIC had become a toothless tiger, and needed to be more aggressive in their dealings with institutions that were doing the wrong thing. ASIC has taken this on board and has just announced that one of their major priorities will be on actions that harm the most vulnerable consumers. They are also aware that what may be legally correct may not be in the best interests of consumers.

Any credit card issuer focused on doing the right thing by their customers would not even contemplate enticing them into long term debt at high rates of interest. A better message would be: "We note your balance is $852.52, and remind you that to avoid high interest charges the full balance should be paid by the due date. If you are experiencing difficulties in making payments, contact us and we will work with you to help you get your finances in order." Don't hold your breath.

ASK NOEL

Question: I am helping my mother-in-law with her financial matters. She moved in to a retirement village recently and got $1.5m when she sold her house. She has $1m in savings now and this meant she lost her part pension. Centrelink FIS said she could put $300,000 into a certain type of investment to gain tax advantages but this must be done within 90 days from settlement. I forgot the type of investment - is it an account-based pension sourced from a super fund?

Answer: They would have been talking about the downsizing provisions that enable a person to put up to $300,000 from the sale of their home into superannuation, irrespective of their age or their present superannuation balance. But I wonder if it is worthwhile in this case - if she leaves the money in accumulation mode the income will be taxed at 15% from the first dollar earned, and if she chooses the tax-free pension mode she will be required to withdraw 11% of the balance until she turns 95 when it will rise to 14% of the balance.

Ask your accountant or adviser to do the sums on keeping the entire portfolio in her own personal name instead of super. If a substantial part of the portfolio is invested in Australian shares paying franked dividends the tax would be minimal, and she could always make a small tax-deductible donation to charity to wipe out any small amount of tax that may become payable. Also, by keeping the money in her own name she avoids the fees that all super funds charge, and eliminates the possibility of part of her superannuation being subject to the death tax when she dies.

Question: My wife and I are self-funded retirees and are drawing an account-based pension. Our house is on the market for about $1.2m from which we should receive about $900,000 after paying off the mortgage. We plan to downsize to a unit or townhouse but are prepared to wait a year or more, travelling and/or in rented accommodation, until we find what we want, particularly as prices are dropping.

What would be the best way of making the $900,000 work for us in the meantime bearing in mind bank deposit rates are so low. We are prepared to look at managed equity funds.

Answer: For a relatively short term such as the one you have in mind, the only realistic option is an interest-bearing bank account. A managed equity fund may give you better returns during that time, but it may also lose value. This is why I always recommend people do not invest in share-based investments unless they have a 7- to 10-year timeframe.

  • Noel Whittaker is an Australian financial planning expert and the author of Making Money Made Simple. Send your personal finance questions to noel@noelwhittaker.com.au