The Credit Trap - Part 1

A new credit card has just been released in Australia that charges 0% interest, Wow! A bank, of all organizations, wants you to spend their money free of charge. I can't wait to get my hands on this piece of plastic.

The news about this card was apparently so good that it even made it as an article on A Current Affair, the shining light of Australian TV journalism. For those outside of Australia, A Current Affair is a half hour "current affairs" program which runs after the 6pm news.

I shouldn't be hard on ACA. They did say that it was a comparison between the new card and existing cards on the market. Funny then that they focussed most of the story on a woman who has a massive credit card debt.

This lucky woman gets her 7 minutes of fame because she spent above her means and is now saddled with a huge debt with an even bigger interest rate.

So what does this have to do with the new credit card? Well, the new credit card has 0% interest for the first four months only. After four months (and a new plasma TV, leather lounge, new hair and total nails replacement), the interest rate goes up to 12.99% (whatever happenned to rounding off, everything these days seem to hang off the edge. It's as if people have been brainwashed into thinking that 0.01% will actually save them money!). This is ACA's service to the community at large to be wary of credit cards.

The reasoning implied is that once the interest rate goes up, you the cardholder, are back to square one. In debt and therefore property of the bank which holds the plastic leash which you so happily clamped around your neck.

So all credit card providers are evil. Credit cards are evil and we should pay for everything in cash or go back to the barter system. Thats what the TV seems to be saying everytime there's a story about the "dangers of credit cards". Its not the card, its the hand the wields the card. It's the ill-informed consumer who takes on an offer that sounds too good to be true and usually is.

In this age of information, its hard to believe that people keep falling for the old "it was in the fine print" marketing ploy. Like a double agent, it works both ways because it's a marketing ploy and also a good excuse when one finds themselves in debt trouble.

But hang on just a minute, you mean to say an offer of 0% interest does not immediately start the "whats the catch?" alarm bells ringing? Are we as a society so heavily brainwashed by consumerism that we fail to question the offer of free money? There is always a payback. It's just plain old common sense.

Credit cards can be useful if used correctly. You basically have 55 days (in most cases) to pay back what you spent. The trick is to pay it back in full. But aye, therein lies the rub. If you are paying back in full whats the point of a credit card? The point is that you have anywhere from 20 to 30 days to make that payment. This means a paycheck or two somewhere in that timeframe which can be used. You are not dipping into your savings but spending your usable income.

Of course, this will only work if you are spending within your means and if the purchase is large, you have previously saved at least part of the repayment. The trick is to repay the entire purchase(s) before the interest kicks in which is basically the moment you make a minimum payment. The kicker is that all interest is backdated to the date of the purchase. So 20-30 days of interest gets added on. Tough cookies if you did buy that plasma TV. Or borrowed cash from your credit card (usually attracts the highest interest).

This rant is not financial advice in any way or an endorsement for any particular credit card provider. I'm just sick and tired of these people on TV complaining about how they were duped, conned or mislead. What are we ... sheep? Question the offer and if you can't figure it out, speak to an accountant, the Department of Fair Trading or check out www.NotGoodEnough.org. There is a lot of information available.

An informed consumer is an empowered one. We, as consumers should not be falling for the same old marketing strategies. I quit year 10 Economics for Chemistry but I still remember this: in any transaction, caveat emptor ... buyer beware.