Saturday, November 16, 2013

Bill Shorten's Credit Card Reforms

On Tuesday night, our new Prime Minister, Tony Abbott did an interview with Leigh Sales on abc730, here is an exerpt.

LEIGH SALES: Your next priority after the carbon tax repeal is raising the debt ceiling by $200 billion. Will you release the Treasury advice recommending why the ceiling needs to be raised by such a substantial amount?

TONY ABBOTT: Well, what we know, Leigh, is that in Labor's last published budget update, the gross debt was forecast to reach $370 billion. We also know, because the former Treasurer told us, Mr Swan told us that there should be a $40 to $60 billion buffer for safety against contingencies and what that means is that Labor's proposed $400 billion debt ceiling won't even cover the debt that Labor left us at election time.

LEIGH SALES: But you've had updated - sorry to interrupt, Prime Minister. You've had updated information from Treasury since then. Will you release it so that we can actually, the public, have a look at the independent advice rather than take your political argument at face value?

TONY ABBOTT: Well certainly MYEFO will be the next release of that kind of information, but we're quite happy, Leigh, quite happy to organise a confidential briefing for the Opposition Leader. The Opposition Leader hasn't had an enormous amount of experience in economic portfolios and if he wants a briefing, if he doesn't trust the Government, we'll certainly organise a briefing for him from the Treasury Secretary.

As is quite common with Tony Abbott, sometimes he says things which don't make a lot of sense. Taking Greg Hunt's advice, I consulted wikipedia and found out that Bill Shorten was in fact Minister for Financial Services and Superannuation, 14 September 2010 – 1 July 2013.

Now, rather than debate what Tony meant by that off the cuff comment, I thought it would be better to highlight one of my favorite little reforms implemented during this time which is little known in the wider community.

Here's a speech which Bill Shorten made on 8th Jun, 2011, Consumer Reform and Consumer Credit

Have a read yourself, it's always better to go to the source than read someone else's interpretation, but here are the dot points about the Credit Card Reforms

  • a prohibition on over-limit fees unless consumers specifically agree that their account can go over the limit;
  • requiring credit card providers to allocate repayments to higher interest debts first;
  • requiring greater consistency in the operation of interest charges;
  • prohibiting unsolicited credit limit extension offers unless the consumer has agreed to the service;
  • giving consumers more say over nominating their own credit limit;
  • disclosing a clear summary of key account features on credit card application forms; and
  • disclosing information to consumers about the implications of making only minimum repayments.
There's lot of great stuff in there, but I want to draw your attention to just one regarding credit repayments. Nearly all credit cards have two interest rates, one for purchases and one for cash advances. The rates vary, but it's not uncommon to see 12.99% for purchases and 20% for cash advances.

Now ideally, you pay off your credit card every month and you end up paying no interest, but life doesn't always work out as planned. So you might have a credit card debt, but there are actually two debts, paying separate amounts of compound interest. You might notice this with your monthly interest repayments which show up in your account. One is for cash advances and the other for purchases. Dig into your online banking and you should be able to see your total cash advances, remember, this is very expensive debt attracting say a 20% interest rate.

Now this is the ugly part, depending on your bank (etc), when you make repayments, they choose to pay off the cheaper debt first, this is one way that your credit card debt can spiral. You pay some money off on your credit card and the bank ignores your expensive debt and pays off the cheapest debt first. Aren't they just lovely?

This is a key problem that Shorten has resolved. Any new credit card issued since sometime in 2011 automatically must have repayments directed towards the most expensive debt first, but older cards remain the same. You have, however, now gained the right, thru these reforms to direct your bank to change their behaviour and pay off the most expensive debt first, it only takes five minutes on the phone to do this.

So, ring your bank and ask them about your credit card repayments! It's easy!

Now ideally, you should go and get a personal loan to pay off the credit card, thus avoiding the higher rates, but not everyone will do that. So, if you are carrying cash advances on your credit card, which sometimes includes bills you paid via credit card, there is a simple way to quickly reduce that amount.

After you have instructed your lovely bank to use your repayments to pay off the most expensive debt first, keep using your credit card for purchases. Sounds strange? It's pretty simple, rather than using EFTPOS or cash, instead, use your credit card for purchases and pay the money off your credit card. This way you are converting your cash advances to purchases, reducing the interest rates from 20% to 12.99%.

It's a nice reform which is easy to take advantage of, thanks Bill Shorten and the ALP.

Guess that was another "gospel truth" from our Prime Minister, shouldn't we judge politicians by outcomes?

DISCLAIMER: I'm not a financial expert by any means, please consult your bank or accountant about this, I'm just highlighting something you can look into.

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