Warnings to beware the credit card trap

BUYER BEWARE: If you make only the minimum credit card payment each month, it will take you longer and cost you more to ...
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BUYER BEWARE: If you make only the minimum credit card payment each month, it will take you longer and cost you more to clear your balance.

Consumers could soon encounter a new class of product warning message as consumer debt joins cigarettes and food products as an area of regulatory action.

But a requirement to add warning messages to credit card statements, debt contracts, and advertisements for "short-term, high-interest" lending is facing opposition.

The Ministry of Business, Innovation and Employment (MBIE), which is consulting with industry on the regulations, said there is evidence to support a "minimum repayment warning" to highlight the high cost of paying off credit cards by making only the minimum payment each month.

"It encourages borrowers to make better debt repayment decisions," the ministry's consultation paper said.

The requirement for the warning on credit card statements comes under the Credit Contracts and Consumer Finance Amendment Act. The question is whether to adopt a generic warning as in the UK or personalised calculations as in Australia and the US.

A generic warning would simply state: "If you make only the minimum payment each month, it will take you longer and cost you more to clear your balance."

MBIE said the Consumer Financial Protection Bureau conducted a survey of cardholders in February 2011 to test the effectiveness of the US individual calculations.

"Results indicated that 70 per cent of cardholders had noticed that monthly statements now contain information about the consequences of making only minimum payments, and that 31 per cent of cardholders who recall seeing the new information on their statement report that this information has caused them either to increase their payments or reduce their use of credit."

However, the Financial Services Federation opposes forcing credit card providers to include individualised repayment calculations in their statements. Such calculations would show how long it will take for repayment if only minimum payments are made and how much extra that would cost in interest.

The Federation's executive director Lyn McMorran said personalised statements would require costly systems upgrades for lenders. Also, federation member American Express had studied the effects of such individualised calculations in Australia, and found they did not change behaviour.

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"They did a study where they analysed six months of cardholder behaviour before the change, and compared it to six months of cardholder behaviour after," McMorran said. "Absolutely nothing changed."

MBIE said academic evidence suggested warning statements including calculated information about the costs of certain repayment strategies are "very effective at changing repayment behaviour".

However, that claim appeared to be undermined by the paper the ministry cited.

The authors of Minimum Required Payment and Supplemental Information Disclosure Effects on Consumer Debt Repayment Decisions reported: "Our results suggest that neither including minimum payment information in credit card bills nor disclosing additional information . . . works as intended, and therefore we advocate a 'clinical trials' approach to regulation in which further changes are tested experimentally before a broader introduction.

"Our research suggests that relying on this information disclosure alone is not likely to offset the negative effects of including minimum payment information in the bills and probably will not increase debtors' monthly repayments to the levels expected."

New Zealand Bankers' Association chief executive Kirk Hope said there are marked differences between the behaviour of New Zealand credit card holders and those in Britain and the US.

"Only 3 per cent of New Zealand credit card holders pay the minimum each month," he said. "That's compared to 13 to 14 per cent in the US and UK. More than half of New Zealanders who have credit cards pay off their balance in full each month, while only a third in the US do."

The Australian experience may also be useful here, he said.

"Our members with Australian parents have advised there has been no change to the number of customers who only pay the minimum repayment each month, despite this disclosure being required in Australia."

Minimum repayments on credit cards are low - as little as 3 per cent at many card issuers (see sidebar), though it can be as low as 2 per cent.

The UK did debate lifting minimum repayments to 5 per cent of the outstanding balance, but opted not to do so. That has never been raised as an option in New Zealand.

The Interest.co.nz minimum repayments calculator shows that at minimum repayments, it would take someone with a $5000 debt 22.1 years to pay it off, if they had a standard ANZ MasterCard, compared to 43.2 years on a BNZ American Express Classic, and 82.9 years on a Westpac Visa Classic.

Long repayment periods can result in tens of thousands of dollars of additional interest being paid.

That makes them traps for the unwary, said financial consultant Stephen Anderson, who has built credit card repayment calculators in the US. Anderson also doubts protestations that the proposals would require system upgrades.

"The credit card companies have the systems to handle this," Anderson said. "More information can't be a bad thing."

There was a seasonality to the use of minimum repayments, he said, with consumers opting for them at times when they were cash-strapped, such as around Christmas.

MBIE has asked credit card providers to tell it the proportion of cardholders opting for minimum repayments.

 - Sunday Star Times

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