Debt Consolidation, Debt Solution, Debt Relief

The two main players in the Charge Card industry have made losses 2 years running. Financial statements for American Express Australia and Diners Club show that both companies have been operating in the red.

AMEX have reported a slight drop in revenue to $1.3 billion over the year to December 2009. Income from merchant fees, which is 43 per cent of revenue, increased but net interest income and service fees charged to the global company fell.

American Express have recorded a reduced loss, of $21.9 million in 2009 down from $76 million in 2008.

The charge for bad and doubtful debts increased to $279 million in 2009 from $181 million the year before. Some of this rise is due to one-off factors since Amex now writes off overdue loans after six months rather than one year, and to fit in with the rules for bank holding companies (which American Express now is, and reflecting the need for bank status in the wake of the financial crisis).

According to special purpose accounts filed with ASIC,  Diners Club charge card revenue fell 28 per cent to $79 million in 2009.  Diners Club Charge Card is under the Citibank group ownership at the moment.

The loss after tax widened to $7.9 million from a loss of $3.1 million in 2008.

Receivables, which are all charge-card related, fell 10 per cent to $251 million.

It is a mistake to assume that only those on low incomes are at risk of going bankrupt.

According to a study conducted recently by the Centre for Corporate Law and Securities Regulation, middle class people are around twice as likely to be forced into, or choose, personal bankruptcy than people in other socioeconomic groups.

Using basic demographic data in the annual reports of the Insolvency and Trustee Service, two researchers at the centre found that 28 per cent of insolvents in 2008 were in the occupation groups comprising managers, administrators, professionals or associate professionals, more than twice the percentage of that in 1997.

In 2008, 38 per cent of insolvents had personal income of $30,000 or more, up from 13 per cent in 1997.

By far the most significant  increase in insolvency has occurred within households with income of $50,000 or more, representing 49 per cent of bankrupts in 2008.

Several interest rate increases in a row, combined with dwindling government stimulus action and tighter credit conditions will continue to make recovery difficult for 80,000 Australian businesses that had their risk profile downgraded.

The recent risk research work conducted by Dun & Bradstreet reveals the number of firms downgraded has risen by close to 15,000 compared to the same time last year, a period when the local and global economy was continuing to face huge pressures from the global credit crisis.

The research also reveals that downgrades have resulted in more than 36,000 Australian firms being classified as a high risk of experiencing financial distress in the coming 12 months.  Dun & Bradstreet’s director of Corporate Affairs, Damian Karmelich says: “It’s an important sign that risk remains prevalent and firms must be constantly vigilant”.

As a result of the threat of class action by Maurice Blackburn most of the 12 banks targeted have cut their fees for late payments of credit cards.

The number of people who have chosen to  join Australia’s biggest class action over banks’ exception fees exceeded 82,000 on Monday.

The research from financial comparison website RateCity shows four banks have lifted exception fees on credit cards over the six years under question by Maurice Blackburn.

The class action is intending to focus on honour, dishonour, over-limit and late payment fees which Maurice Blackburn claims were punitive charges as they were much higher than the actual cost to the bank for a breach of contract on the accounts.

From May 2004 to May 2010 four of the banks, including global giant HSBC, increased their fees charged for late minimum payments on credit cards by an average of 35 per cent.

A comparison performed by Ratecity has found that the fees charged by Bank of Queensland (BOQ), BankWest, Suncorp Metway and HSBC were at least 26 per cent higher this month than in May 2004.

Commonwealth Bank of Australia (CBA) and Bendigo and Adelaide Bank held their average fees steady over the six years.

ANZ Banking Group, Westpac, National Australia Bank (NAB), Bank of South Australia (Bank SA), St George Bank and Citi cut their average fee.

Excluding Citi, these banks made the fee cuts during the previous 12 months, under pressure from NAB’s fee-cutting campaign.

Citi lowered its average fee from $60 to $40 by May 2009, and this remains the highest average fee in the market.

Research has confirmed that the lowest fees charged were by NAB’s (average $5 fee).

Citi, along with the same four banks that increased their fees, also raised their average fee charged to customers who exceeded their credit card limit, RateCity’s research showed.

The average fee increase across the five institutions over the past six years was 45 per cent.

Westpac, CBA and Suncorp had no unauthorised overdraft fees applying to transaction accounts during the six years, RateCity said.

Apart from Citi, all remaining banks reduced or abolished their unauthorised overdraft fees on transaction accounts over the past 12 months.

Citi’s unauthorised overdraft fee remains the highest at $35.00 per transaction.

In Australia Small Business Owners are being faced with a significant increase in bad debts.

Many people are struggling with Mortgage Stress and the increasing inflation.  On top of this, sliding consumer confidence has meant that people are spending less, this has had a negative impact

ASIC’s latest data on companies declaring bankruptcy for February was higher than 2009 – 827 cases (796 in 2009) – with insolvencies hitting 1159 nationally.

Unfortunately,  legally speaking one can close a business down, and open under a new name without needing to pay their old debts.

Taking charge of your bad debts

- get legal advise if you feel that someone is looking to take advantage of you;

-seek part payments upfront whenever possible;

- continue to negotiate even when your debtors claim to have no money;

-seek to insure your business for bad debts;

Purchase rates on credit cards rose by as much as 60 basis points and cash advance rates by as much as 75 points during April  2010.

It seems that while lenders are very aware of the sensitivities associated with home loan interest rate changes, there appear to be no such concerns when it comes to credit cards.

On April 28 Citibank increased the purchase rate on its personal credit card by 60 basis points, from 14.99 to 15.59 per cent.

According to Infochoice, Heritage Building Society, Aussie, Macquarie Bank, National Australia Bank and Suncorp have all increased the  purchase rates on their cards by 50 basis points. Community First Credit Union increased the purchase rate on its card by 49 points.

Heritage Building Society increased the cash advance rate on its Visa Classic by 75 basis points. Aussie increased the purchase rate on its Aussie MasterCard by 70 basis points.

Heritage, HSBC, Macquarie and Community First all increased their cash advance rates by 49 basis points or more.
Certainly consumers should take a lot more care in placing reliance on credit cards as it appears that lenders are having a field day with credit card interest rates.

With interest rates on store cards as high as 30 per cent, credit cards at 15-20 per cent and personal loans averaging about 10 per cent, it seems obvious that refinancing these debts on to a mortgage rate of, say, 7 per cent, can save you a considerable amount of money.

And there’s never been a more important time to do it, with interest rates on the rise and forecast to keep rising for another year or more.  However to be able to consolidate your unsecured debts into your mortgage you must have sufficient equity in your home to be able to qualify for consolidation.

Credit information agency Veda Advantage’s latest Galaxy survey shows 64 per cent of people would like to reduce credit card debt in the coming six months, with almost half planning to pay the full amount.

According to Veda Advantage, people are becoming more careful with credit, looking to consolidate existing debts where possible instead of applying for additional loans.

Veda statistics have also identified that 19 per cent of people are “severely stressed”, by which they mean they are struggling to make their next debt repayment, or “don’t know how they were going to make it at all”.

For some of these stressed borrowers, debt consolidation could be the answer, helping to free up valuable cashflow.

Credit Reporting Changes

Hardship arrangements work well right now but from 2011, when the Government  is intending to introduce”comprehensive reporting” for credit reference purposes, any hardship arrangements will start showing up on your payment history and will adversely affect any future credit applications.

Katherine Lane, principal solicitor of the Consumer Credit Legal Centre in New South Wales, says while debt consolidation loans may serve a purpose for some, they are not the solution.  “You cannot borrow your way out of debt,” she says.

Consumers need to seriously revisit their spending habits and income.  If this is not done a consolidation loan could only further contribute to the debt problems faced by many Australians.