Borrowing 'splurge' gorges on easy credit

Eftpos terminals will see a lot more cards during Christmas despite Alan Bollard's warnings about spending. Picture / Kenny Rodger

Profligate consumer spending, which gets kicked up a notch in December, has kept the economy humming, but some belt-tightening is in order, a banking expert has warned.

David Tripe, the director of Massey University's department of finance, banking and property, says New Zealand is experiencing "a real splurge" of borrowing.

Primarily this is due to the country's over-heated property market, fuelled by the ease of borrowing.

Despite much finger-wagging by Reserve Bank Governor Alan Bollard - widely regarded as the Christmas Grinch for raising the official cash interest rate to 7.25 per cent this month - homeowners have continued to borrow against the increased capital value of their properties.

But when property prices stop increasing exponentially, people may find themselves "over-extended", Mr Tripe says.

"Or it may be retailers who end up suffering, because they have been selling on the backs of people borrowing."

Banks encourage credit card usage because they get a better "revenue stream" from retailers' fees and hefty interest charges from "debtors", people who don't pay their bills on time.

In the year to June 20, 2004, New Zealanders used credit cards to purchase goods and services worth $20 billion. Around a quarter of cardholders paid monthly interest charges, with an average outstanding monthly balance of $1600.

Yet 65 per cent of those surveyed by Massey researchers had no idea what their interest rate was, and 59 per cent did not know what fees they were charged.

Even so, Mr Tripe says that although spending has gone up, the increasing proportion of "non-interest bearing debt" suggests New Zealanders are becoming more strategic about their credit card usage.

With loads of features to assess - rewards programmes, annual fees, interest rates, interest-free periods, currency conversion fees - it can be confusing working out which card is best.

CardWatch, an online rating system by investment management consultants FundSource, assesses all the cards in New Zealand from one to five stars based on whether you are a "transactor" or a debtor".

CardWatch spokeswoman Laura Somers-Edgar says many are realising there are "real benefits to using credit cards for everyday expenses".

"These 'transactors' don't incur transaction fees, they accrue rewards points and get the benefit of interest-free days, which are hugely valuable if you're earning interest on that money." However, the convenience of using a credit card is costing cardholders tens of millions of dollars more each year than it has to, Ms Somers-Edgar says.

"New Zealanders pay $500 million on interest payments alone each year ... If they had shopped around, last year alone they could have saved more than a third of that, around $200 million."

Although there is "the odd case" of credit card debts getting out of control, New Zealand banks are generally "cautious" about raising people's credit limits, she says.

"We don't have the problems like they do in the States with pre-approved credit card offers."

However, there are signs that credit cards are being marketed more aggressively.

This month, the Bank of New Zealand came under fire for being "socially irresponsible" in offering credit cards with pre-approved limits of up to $5000 to thousands of non-bank customers on the Fly Buys database, which turned out to include bankrupts, unemployed and people with intellectual handicaps.

Banks insist there are adequate safeguards in place. But Banking Ombudsman Liz Brown says there have been a number of cases in which banks have issued cards to people incapable of repaying the debt.

In one case, a beneficiary with a gambling addiction and bipolar disorder was initially given a $3000 credit limit, which was upgraded to a gold card with a $9500 limit.

"I would like to see a change in the code so that when banks are offering credit increases, the customer has to take some action to receive that extra credit," says Ms Brown.

Consumers' Institute head David Russell says such offers are "ethically reprehensible". But the mailout underscores the lesson that people should be careful about putting their signature to any document, he says.

The numbers

* $20 billion: The value of goods and service bought on credit cards in the year to June 20, 2004.

* $4 billion: The amount New Zealanders owed on credit cards in September, up $217 million on last year.

* $1.13: The amount spent for every $1 we earn - the worst in the OECD.

* 8 per cent: The share of GDP which measures the gap or current account deficit between what New Zealanders spend and what we earn.

When your plastic's proving less than fantastic

* If you have outstanding debt each month, consider transferring the balance to a low-interest card, which could save hundreds in interest and reduce debt faster.

* If you have a large balance to pay off but you still want to use your card for day-to-day spending, consider splitting your usage between two cards: choose a debtor card for the outstanding balance and transactor card for the new spending you will pay off each month.

* Choose cards that will allow balance transfers, so that if you are occasionally unable to pay the balance on the transactor card, you can transfer it to the debtor card and avoid high interest charges.

* If you are being charged interest, don't wait until the due date to make your payment but do it as soon as you have the money. This reduces the interest you are charged.

* If you have a problem with impulse shopping, try putting the card in a glass of water and freezing it. In the time it takes to thaw out, you will have ample time to think seriously about whether it is a necessary purchase.

* If you can't afford the card, chop it up.

Source: CardWatch

- NZPA