In your interest: Paul Clitheroe

It takes a fair bit to make me really cranky but our credit card lenders have managed to do exactly that. For many years I have been trying to get to the bottom of the true cost of credit cards and the impact on their victims. In particular I have been pushing the point that balance transfer cards are a debt trap.

The debt trap was my major theme at a mid-2015 senate hearing but I just could not get the numbers to back up my case. The argument is easy to make. While we all need a profitable and secure financial system, meaning we want lenders to make money, there are fair ways and means to do so. Credit card balance transfers are not fair for the unwary or those in financial difficulty.

Let’s look at this. Firstly, what lender is going to lend you or I on a “zero interest” basis if we never pay them a cent for the money? Lenders may be many things but they are not stupid. So their sophisticated algorithms around consumer behaviour tell them that 100% of people will not borrow money for zero interest and pay it off in the interest-free period. In reality, those who transfer to a zero-interest card do so with enthusiasm. We think “terrific, we’ll use the interest-free period to pay off our debts”.

Now that would be a wonderful result and for some it will be a reality. But for many it is hopeless and unrealistic. The lender will need to be sure you can make the minimum repayments when the card goes back to around 21% interest but repayments are low.

So let me tell you what really happens. Let’s say we have $8000 on a high-interest card. We do a transfer to a card with an interest-free period. But, we tend not to cut up the original card. So there we are with our shiny new card with most of our debt on it but the old one still in place.

The “crap factor” about these credit cards is to ask ourselves why we have a debt on it. That’s simple. We’re spending more than we earn. No one tells us this, so feeling much freer we spend away, rebuilding debt on the zero-interest card. Once the interest-free period is over, we start paying around 21% on the new card. The old card is probably back to $8000 and we pay high interest on this. Now we have double the debt. What a scam!

Thanks to ASIC we now have a new source of information to pressure lenders. This is the best sort of information – facts. Let’s look at them.

1. Some 18.5% of consumers are struggling under a pile of credit card debt that may never be paid off.

2. We pay interest on $31.7 billion of credit card debt.

3. Balance transfer cards are a “debt trap” with 550,000 people in arrears and 930,000 in persistent debt.

4. Consumers could save $621 million if they switched to a lower-interest card with fewer frills.

If you are not outraged by this you should be. Sure, I get the point lenders make. They flog money for a profit and shareholders benefit. They also provide many services we need: access to our cash, safe cash-type investments and low-interest mortgages. They also argue that we should be responsible for our own decisions. But I argue that a large number of consumers do not have that knowledge or capability and we need regulations to stop abuse. So I am delighted to see this detailed report from ASIC and I encourage you to spread the word about it. Regulations can protect consumers but I do know we can do more to protect ourselves.

Some 18.5% of consumers are struggling under a pile of credit card debt Paul Clitheroe