Debt Consolidation, Debt Solution, Debt Relief

AUSTRALIANS are expected to spend $27.4 billion this December in an annual Christmas shopping ritual, but most will avoid using credit cards whenever they can.

Credit card balances in Australia had fallen to $49.11 billion for October, the fourth monthly decline in credit card use since 1985 when statistics on credit card use began to be collated.

Mastercard spokesman David Masters believes that in the current economic climate consumers may have been holding off on spending to prevent any debt problems early in the new year.

But he said the Reserve Bank of Australia data also showed that consumers are putting more effort into repaying their unsecured debts than they are into reducing their home loans.

“The key measure of this is the annual growth rate in credit card repayments which hit 6.92 per cent in October 2011, well up from the 1.99 per cent recorded in October 2010,” Mr Masters said.

“Outstandings on cards now represents just 3.63 per cent of total household debt their lowest point for over 11 years.

Post GFC consumers have become significantly more aware of debt and focus on debt consolidation and repayment.

He said credit card and debit cards systems had built-in dispute mechanisms for consumers if fraud was suspected or promised goods were not provided.

Mr Masters said a rise in the number of purchases made on credit cards this month, as opposed to the decline in overall credit balances, pointed to the fact consumers may be opting to use cards for online shopping.

“One reason many consumers opt for cards is that they offer consumers a level of confidence that they are fully protected in the event of unforeseen problems with orders or purchases,” he said.

According to a recent survey, If RBA was to announce a cash rate drop next month,  borrowers are more likely to pay down their debts with the extra funds than use the money towards Christmas shopping.

It is unclear at this stage if RBA will move to reduce cash rate at their next meeting scheduled for cup day.

An online survey by mortgage broker Loan Market found that 55 per cent of respondents would reduce further their home loans should the Reserve Bank cut the 4.75 per cent cash rate when its board meets on November 1.

Only 16 per cent of the 460 people surveyed said they would use the savings from a rate cut to increase their Christmas budget, while 17 per cent said they would increase their savings.

Twelve per cent said a rate cut would make no difference to them.

Survey results make it clear that consumers are still very cautious and in these times of economic uncertainty would prefer to consolidate debts rather than take on additional loans.

GENERATION X, being people aged between 30 and 50 are struggling with debts more than any other sector of the Australian population.  In fact experts are believe that these people can well be renamed to Generation Debt.

A new survey for bank RaboDirect found approximately 40 per cent of Gen X say their financial situation has declined over the past 12 months, one-third don’t have enough emergency money to last more than two months, and one-third regularly only just manage to make it through to their next pay day. These people resort to maxing out credit cards, borrowing from family and friends as well as apply for payday loans to help them survive from payday to payday.

Gen X makes up about 40 per cent of the Australian population, according to the last Census, or about eight million people, which make them an influential group, RaboDirect general manager Greg McAweeney says.

Close to 2.5 million Australians in this age group always feel like they’re behind in payments and are only falling further into debt every month.

Debt recovery company Dun & Bradstreet also says Gen X is weighed down by their high levels of debts.

“For years we have been talking about whether Baby Boomers have been saving enough for their retirements but not enough attention has been paid to the fact that Gen X is carrying more personal debt than any other previous generation at a similar age,” Dun & Bradstreet chief executive Christine Christian says.

“Around 40 per cent of Gen X said they would find it difficult to meet their loan repayments, with a similar proportion reporting they would use their credit card to buy something they otherwise couldn’t afford. Once the credit cards are maxed out borrowers look at debt consolidation to reduce monthly repayments – however often this becomes a never-ending cycle of more debt.

Data from survey company TNS Consultants found 30 to 50-year-olds have a high incidence of home loans and other borrowings compared with other age groups.

“Around 66% have a credit card but in terms of repayments, this group is more likely to just make the minimum payment. This eventually brings their credit card debt into levels they can no longer afford. Given the declining values of property, borrowers who wish to consolidate credit card debt into their mortgage are finding that they either do not have sufficient equity, or sufficient income to be able to do so.

Baby Boomers are the most confident about their finances, the survey found. They know what the current interest rates are and they find dealing with their finances less stressful.

NAB has issued a challenge to other rivals to match its offer to credit card holders by applying credit card changes to both new and existing accounts. If other banks and credit card providers would follow suit that should collectively save Aussie customers up to $225 million.

Credit card reforms proposed by the Federal Government were passed by the lower house yesterday after receiving opposition support, The Australian reports.

Under the changes, over-the-limit fees will be scaled back while unsolicited credit limit upgrades will be banned altogether.

Banks will also have to alter repayment systems to ensure that when a consumer makes a repayment it is put towards their most expensive debt first.

The moves are part of the government’s attempts to increase competition in the domestic retail banking market, which is dominated by the top four.

The legislative changes apply only to new credit card accounts, despite a last-minute bid by the Greens to have the laws applied to existing accounts.

While the new legislation has not yet become law, NAB has been proactive in already abolishing over-the-limit charges and reducing its late payment fees from $30 to $5 for both new and existing accounts. NAB has further issued a challenge to its rivals to do the same.

The reforms still have to pass the Senate, but are likely to proceed without amendments.

The plan to ban mortgage exit fees has already proceeded through the Senate and accepted by the Senate.

NAB head of personal banking Lisa Gray said the bank’s move to cut the charges ahead of the government’s changes had benefited the bank.

NAB, which is the fourth-largest bank by market capitalisation, says if the CBA, Westpac and ANZ match its moves their customers could save up to $225 million.

Other banks do not need to wait – rather they should be pro-active in implementing proposed changes as these changes will benefit the customer.

RBA is considering introducing limits on credit card surcharges as a result of an increase in fees being charged by many card providers.

The RBA payments system board believes that introducing a cap on credit card surcharges is a good idea. It is currently seeking industry feedback on this issue to determine if and how it can be implemented.

There has been increasing evidence to suggest merchants are more often setting surcharge levels higher than their average merchant service fees.

Merchant service fees are charged by a retailers’ bank and cover the cost of processing transactions, guaranteeing payments and the cost of the credit card terminal.

Surcharges above those fees distorts the ability of customers to know the cost of different transactions, the board said.

Since credit card surcharges were introduced, many customers have avoided transactions carrying the extra charge. The RBA’s 2010 research suggests surcharges were paid on just five per cent of credit card transactions each week.

MasterCard fully supports the RBA’s investigation of surcharges.

It said blending surcharges for different types of credit cards had also become an issue.

Different credit cards carry different merchant service fees and blending the surcharges distorts the true cost to customers of using different cards, Mastercard vice-president of strategy and corporate affairs David Masters said.

“It’s a very simple equation. Any surcharge levied by the credit provider increase the price consumers pay, but excessive and blended surcharges are particularly insidious as consumers often do not realize just how much extra they are actually being charged.

Submissions to the payments system board close on July 20.

A new study reveals that one in seven Australian adults is under such financial strain that they are unable to afford insurance cover for their homes and cars, a new study shows.

It seems that over 2.6 million Australians would not be able to find $3000 in an emergency and many have no access at all to basic banking services,

The study, conducted by the National Australia Bank and the Centre for Social Impact, said those who couldn’t raise funds were less likely to have insurance cover, leaving them exposed to large costs.

The study found that just 46.4 per cent of severely financially strapped people had home contents insurance and only 59.2 per cent of them had cover for their cars.

NAB chief executive Cameron Clyne said adults who are unable to qualify for loans due to low income or bad credit history are more likely to experience escalating debts with no relief. These are the people who end up resorting to high costs short term loans offered in the unregulated finance arena.

Credit card users are now paying a lot more for their credit cards than they might realise.

With the cost of living escalating more and more households are resorting to using credit cards to cover the family’s weekly expenses. Many op for a low rate, balance transfer card  – however these cards are not what they are perceived to be. Recently, credit card providers have hiked “hidden” interest rates to 19.18 per cent and reduced honeymoon periods.

Based on information provided by Ratecity – financial comparison website, Credit Card holders are now paying an extra 0.42 of a percentage point on the average hidden interest rate after the honeymoon period.  Lenders market to borrowers products with perceived lower interest rates in order to attract more credit card holders with large balances. These balance transfer rates apply for a honeymoon period, before reverting to higher, permanent interest rates.

Research shows that honeymoon periods offered with credit cards have been significantly reduced, often without the knowledge of the credit card holder, some of these periods have gone to less than half of the Honeymoon period originally advertised by the card provider.

And there are 32 fewer balance transfer cards on offer since December, with just 21 offering a balance transfer interest rate of less than two per cent, seven fewer than six months ago.

Sixty-four per cent of Australian adults had at least one credit card by March.

Of those, 61 per cent intend to reduce the debt within six months, Veda Advantage’s most recent debt study shows. However with increasing costs of living and higher costs of credit, it is difficult to implement a debt reduction strategy for many.

GE Money’s GO MasterCard is the most expensive, slugging borrowers an interest rate of 21.74 per cent, while Citibank charges 20.99 per cent on three products and Macquarie Bank charges 20.95 per cent on two.

Finance companies offering high volume, low value credit products, such as credit cards, will need to refer to specific financial obligations of the borrower before qualifying the application.

Responsible lending obligations under the new credit law require all finance providers to verify to the best of their ability that the loan application they are considering, will not place the applicant in a position of financial hardship.

The Ombudsman’s view is that generic financial data can omit the particular needs of the borrower, such as additional medical and pharmaceutical expenses, voluntary commitments, such as school fees, and additional transport costs for people in remote locations.

The Ombudsman said: “Without an assessment of individual circumstances, financial service providers can offer a credit limit which the consumer cannot afford.”

The Ombudsman said NCCP accepts the need for low-doc lending “if adequate inquiries are made and the statutory provisions regarding responsible lending are met.”

“We understand that there is a place for low-doc loans to cater for those self-employed clients who are unable to provide more traditional evidence of their income. However, in our view, low-doc loans should not, as a general rule, be granted to PAYG borrowers.

“We anticipate [that any] no-doc lending on the level previously experienced is unlikely to be sustainable, given the new obligations.”

A loan will not be unsuitable if it meets the consumer’s requirements and objectives, and the consumer has the capacity to repay the loan without experiencing substantial hardship.

Lenders need to consider the stability of all sources of income of the borrower and their length of employment.
ASIC expects that inquiries into the consumer’s fixed expenses, repayments to other loans, variable expenses, credit history, age, number of dependents, assets, and any foreseeable change to the consumer’s financial situation are made by the prospective lender.

ASIC’s position is that the credit provider’s obligations are “scalable”, which means their obligations will vary with the circumstances.

The Ombudsman said that, as a minimum, the credit provider would have to see evidence of capacity to pay, such as verification of income by reference to payslips or, in the case of the self-employed, tax returns and bank statements.

According to the bi-annual Debt Study conducted by Veda Advantage, 21% of Australians are experiencing difficulties with debt management, with one in five people interviewed admitting not being able to keep on top of their Debt Obligations.

These figures represent a 2% increase from the information collected six months ago.

Of the 21% who confirmed to experiencing difficulty with debts, 2% did not know how they would resolve their debt problems.

Of the 21%who were already struggling with debt, Veda said 28 per cent were likely to apply for more credit in the next six months.

It is a real concern that many borrowers who are already experiencing financial hardship are intending to deal with the problem by taking on more debt.

If and when positive credit reporting may be introduced, it will prevent people already with debt problems getting themselves further and further into debt.

The report found concern about the rising cost of living had increased markedly since September 2010 and people were worried about transport and petrol costs which rose 10 per cent over the period.

The new credit code came into effect at the beginning of 2011. This legislation imposes strict guidelines on lenders to prevent loans and credit from being extended to applicants who do not have sufficient income to service the debt. Credit reporting had been under review since January 2006

The Federal Government is intending to implement Positive Credit reporting in Australia in mid 2012. This will assist in identifying credit applications from borrowers who are already struggling with existing debts.

The study found that 57 per cent of people were managing their debts, although 47 per cent had cut back on groceries to repay debt, up from 43 per cent six months before.

The Australian Debt Study Report is conducted in March and September over the phone by Galaxy Research Omnibus.

This is the eighth report, which interviewed 1036 Australians.

It seems that more Australians have learned to use credit cards wisely by repaying outstanding balances within the interest-free period.

In fact the banks are beginning to feel the pain of the large numbers of people who have simply stopped to pay interest on their credit cards.

This was brought to the attention of the media by the RBA.

Over the past couple of years more and more families are using credit cards effectively and do not pay interest.

People have finally understood that lifestyle debt should be avoided and all credit card balances should be repaid at end of month.

Long after the global financial crisis – many Australians worked on repaying fully their outstanding credit-card debt and became what banks call transactors.

Transactors are credit-card holders who pay off their balance regularly to avoid interest charges.

According to the director of public policy for Mastercard, the number of transactors in Australia is increasing.

Over 63 per cent of cardholders now repay their balances every month.

Australians are using credit cards wisely as a method of payment, not as another loan facility.

However transactors are not the customers banks are seeking out. Banks and card issuers prefer customers who are “revolvers” and keep a balance on their card from month to month, thereby attracting high interest payments.

Rewards credit cards

A large number of credit card holders are spending and repaying their balances in order to collect points from the revamped and relaunched card rewards schemes. They are out for the extra benefits for being shoppers.

Many credit cards and card rewards programs introduced or enhanced discounts and free offers to their cardholders last year.

Qantas Frequent Flyer has changed for the better with a big annual fee and many cards are offering tens of thousands of Qantas points on sign-up.

About half the cards on offer have some kind of free extended warranty for major purchases, on top of the manufacturer’s warranty.

About 35 cards offer a lowest price guarantee.

More than 60 offer one-year free extended warranties, and six, all from Westpac, offer two-year free extended warranties according to RateCity.

Some of the smaller card issuers have improved rewards and benefits for their cardholders in order to compete with Qantas and Virgin affiliated schemes.