KEY POINTS:
Kiwis are awash with debt to the tune of $12.669 billion, but the tightened credit environment hasn't affected the readiness of credit and store charge-card providers to keep lending - on high interest terms.
As credit card transactions don't attract the fees of some other payment methods, they may be a good tool for money management, but only if the monthly balance is repaid in full so you therefore avoid paying interest.
Massey University banking expert David Tripe says it can be an expensive credit source if you're using it as a long-term financing scheme.
And it seems many people are doing exactly that, as Reserve Bank figures show just under 70 per cent of credit-card users are not paying off their balances in full each month.
Westpac's Craig Dowling says if someone wants to buy a large item that will take more than a few months to repay, they should look at an overdraft facility instead.
"If a person is looking to carry debt for longer still, we would recommend a personal loan," he says. "A credit card should only be treated as a short-term credit facility."
Basic living costs are rising, says Raewyn Fox, chief executive of the Federation of Family Budgeting Services, "and the temptation is to say, 'it's tight this month, I'll just pop it on the credit card and next month it'll be okay'. Next month it isn't okay."
Her concerns come at a time when the Commerce Commission is investigating credit-card fees and charges, but is unable to make any comment.
Fox says it's easy for people to have too carefree an attitude to card interest rates and charges.
Tripe says surveys by his department have revealed that people often don't even know what interest they are being charged.
Only one-quarter of respondents to a new Buzz Channel survey on credit knew how much interest they were paying.
Banks have traditionally defended high credit-card interest rates on the basis the debt is unsecured.
But Banking Ombudsman Liz Brown points out if someone has a home loan with their bank, it will almost certainly be an "all obligations" mortgage, meaning the document that gives the home as security will secure all debt owed by the customer to the bank. "So technically if you have a credit card with the bank that also holds your mortgage, it may well be a secured debt."
Brown is concerned that on the sale of a home, or on refinancing to another bank, the bank has required the credit card debt also be repaid.
If it is to be treated as a secured debt, it is difficult to argue that interest should then be charged at the high, unsecured rate, Brown says.
BNZ's Blair Vernon says a large component of the interest rate is the cost of funding, "which has seen a large increase over the past few months in light of the global credit crunch. This has impacted on the cost to the BNZ to fund credit provided to customers on lending products, as a significant portion of funding comes from overseas".
Banks want to engage in profitable credit-card lending, which means maximising people's amounts of debt, says Tripe. Their business profitability increases if people have more outstanding on their cards, on which they're paying high interest.
Making only minimum monthly payments means people carry high interest costs over a long period of time.
Hannah McQueen, director of financial consultancy enableMe, says the lower the minimum payment, the longer that interest will be charged on the debt. She has previously calculated if only the minimum payment is made on a $5000 credit-card balance each month, it will take 18 years to repay.
The longer the debt is outstanding, the more money banks make - and the harder it is for you to create wealth, says McQueen.
"I think the average New Zealander does not realise the bank is a business, and they make profits through us having debt with them."
Her stance on credit cards is simple: "Don't use them. You might need one for an emergency as a safety buffer, but I don't think a credit card should be carried in a wallet.
"If you have to use a credit card, it means you are spending more than you earn - so using a credit card will put you in a deficit. You shouldn't make that easy by carrying one around with you every day."
McQueen believes a debit card may be an effective money-management tool, but not a credit card, because "we statistically spend more than we earn - a lot of us do that without even realising. The problem with a credit card is it facilitates the frittering of money without any conscious awareness."
Credit cards can only work for you if you're "really disciplined about how you use them," says Fox.
She says smart card-use is "basically an awareness thing, having done a really good budget to identify how much you're going to have left at the end of each month to pay off your credit card, and sticking within those limits".
"Do your sums, plan ahead, ensure everything is taken care of and don't spend until you know you're going to have the money available to pay for those things."
Almost one-quarter of respondents to the Buzz Channel survey admitted to not planning their commitments to stay within their income, and 29.5 per cent indicated they had a problem with debt or their credit card use.
More than one-third of respondents had two or more credit cards, and only 52 per cent paid off their credit cards in time to avoid interest charges.
ANZ says only 50 per cent of its customers pay their credit cards off in full every month. Those who are unable to pay their balance in full can consider switching to a card with a lower interest rate.
ANZ's Jessamy Malcolm says low-interest credit cards are a good option for people who want to pay off an amount over time, but adds that the lower interest rate is accompanied by a higher annual account fee.
"It's important to weigh this up when deciding if a low-rate credit card is right for you."
Westpac's Dowling says customers should still be wary of building up debt with low-rate cards.
"Low-rate credit cards are designed for cardholders who may spend regularly on their card and not pay off all of their card debt," says Kiwibank's Bruce Thompson.
Kiwibank provides some of the lowest-cost credit card products on the market, he says - its low-rate MasterCard is the first in New Zealand that has no annual account fee if you use your card every three months.
An issue Fox says budget advisers face "a lot" is banks' practice of offering people increased credit limits. "It is tempting and often you don't have to do anything to get the extra limit, it just slips in there over time."
Fifty-five per cent of the Buzz Channel survey respondents said that in the past year, they had been offered an extension of credit that they hadn't asked for. Almost half of those aged 18-25 had been offered a new credit card or extension, and 17.5 per cent of those were 18 years and under. Thirty-seven per cent of students and 43.8 per cent of those unemployed had been offered this. A further 47.2 per cent of those earning less than $20,000 had also been offered this facility.
Brown says banks need to consider more than just their customers' repayment record when making unsolicited offers to extend their credit limit.
She cites a case in which someone with a gambling problem went to the bank with his parents and paid off his credit card, pleading not to be given any more credit. "Shortly after that, he was offered a new card with a higher limit because he was such a good customer, having paid off the old one."
Kiwibank's Bruce Thompson says under current banking legislation a bank can increase a customer's credit limit without their consent. However the customer can request at any time to reduce their credit limit.
Brown thinks it is better practice to offer people increased credit limits and give them the option to take it up.
"It can be extremely difficult for someone on a tight budget not to make use of increased credit when it's offered, when what it means is more food on the table and clothes for the children - the necessities of life."
The National Bank has an "opt in" approach to card limit increases. Customers eligible for an increase are advised in writing and can accept or decline. The limit remains the same unless the customer requests an increase. Westpac and ASB also say customers must "opt in" to any credit extension offers they make.
The BNZ, by comparison, leaves it to customers to contact the bank if they do not want the increase.
Most of Brown's concern is over cases of people thinking they are arranging time-payment for a purchase when they're essentially getting a credit card arrangement.
Fox is also encountering cases of people thinking they were applying for an ordinary hire-purchase loan, but ending up with a charge card instead.
"The new Q Card is one I understand is causing some concern for a lot of our budget advisers, and GE Creditline does the same thing," says Fox. "You apply for a one-off item of hire purchase and end up with a credit facility you can use on an ongoing basis."
But Geoff Lynch, of GE, says: "Customers sign an application form in store which clearly states they are applying for a GE CreditLine card. The documentation fully complies with all relevant regulations."
Fox says interest rates on charge cards are sometimes more problematic than credit cards.
GE Creditline offers its 225,000 cardholders a 25.65 per cent interest rate. Lynch says when calculating the rate, "we have to reflect the true cost of finance and consider all features of the card, including the interest-free and deferred payment facilities".
"Holding the Creditline interest rate up against a standard credit card is not a like-for-like comparison."
