From the Wealth section of The Australian in December
Be careful about the fine print in balance transfers, reports Ed Charles
RACKING up debts on the credit card is tempting, to help fund Christmas and the holidays.
Come New Year, it is just as tempting to move that debt to one of the low or zero-interest balance transfer offers from the credit companies.
But consumers, most of whom don’t read the small print, are finding that balance transfers are an expensive option.
About 80 per cent of consumer finance complaints to the Banking Ombudsman are related to credit cards. Complaints were up 8 per cent to 1189 according to the Ombudsman’s 2005 annual report.
And 2005 was the first year that it reported on line-of-credit/balance transfers, which attracted 15.5 per cent of consumer finance complaints.
Excessive, inappropriate or wrong fees attracted 9.9 per cent of consumer finance complaints.
Denis Orrock, general manager, Infochoice — an online consumer finance information service — says consumers need to understand that when a debt is transferred and the card is used, the balance is paid off at the lower rate first while interest accumulates at the higher rate.
For instance, $10,000 is transferred at a rate of 4.9 per cent. The consumer spends $1000 and pays $1000 off on the card.
The balance at 4.99 per cent is reduced to $9000 while $1000 will remain charged at a full rate of 18.5 per cent, in the case of the Coles Myer Source Mastercard.
Orrock says consumers are also vulnerable to the universal change-of-contract clauses that lurk in the small print of all bank contracts.
A salutary lesson comes from the people who transferred balances to Citibank Ready Credit, a hybrid line of credit and card.
In 2004, Citibank marketed the card as “no application, monthly or transaction fees” at 4.9 per cent for life for balance transfers of up to $25,000. The offer tempted many to roll debt into it and let it sit.
But on October 31 selected customers, who had not used the card, were informed that a one-off fee of $160 would be introduced unless $1000 was spent before Christmas.
Thus $1000 would be transferred to a higher interest rate of 12.99 per cent; $20 cash back was offered for every $500 spent by the New Year.
Many felt squeezed into a corner and went to the Banking Ombudsman with their complaint.
But Citibank’s seems slow to solve complaints. It took a median of 69 days for Citibank to resolve its 337 cases, according to the Ombudsman’s 2005 report.
Both Orrock and Caroline Bond, manager of Victoria’s Consumer Credit Legal Service, say the selective introduction of fees to customers is without precedent in Australia.
Orrock says from the consumer point of view, it is smart to take advantage of low interest to pay down debt. However, he recommends only transfering a balance that can be paid off quickly, should the card provider introduce fees.
Citibank is still marketing Ready Credit. It says that more than 12 months ago it tweaked its marketing to “no ongoing or transaction fees including no ATM, eftpos, cash advance or cheque fees”. The subtle difference is lost on most consumers.
And on November 11, The Australian found Ready Credit still pushed online with “no application, monthly or transaction fees” and a 2.9 per cent interest rate for balance transfers of up to $25,000.
Financial services regulator the Australian Securities and Investments Commission is aware of complaints against Citibank.
It is actively chasing misleading advertising but wouldn’t be drawn on the specifics of the case.
ASIC director, clients and campaigns, Greg Kirk says: “The broad principle is that it can’t be misleading or deceptive. You can do that by omission or commission. If you tell half the story potentially you can be misleading.”
He says often an institution will commit to no fees in its marketing only to be contradicted in standard terms and conditions that allow it to introduce fees in the future.
In July 2003 ASIC accepted an enforceable undertaking from St George Bank in the promotion of its “Starts low, stays low Mastercard”.
Although marketing messages guaranteed the interest rate would stay low, the bank’s standard terms and conditions did not; a clause allowed the bank to unilaterally raise interest rates at any time.
St George revised its terms to include a condition that interest will always stay low.
In December 2004, ANZ bowed to customer pressure and apologised after introducing fees to a Telstra Visa card marketed in 1996 as having “no fees ever”.