The Australian Securities and Investments Commission (ASIC) has urged consumers to be wary of terms and conditions on interest-free loans and low-credit deals amid fears many Australians will accumulate debts they can’t afford in post-Christmas sales.

ASIC’s Deputy Executive Director Consumer Protection, Ms Delia Rickard, said that while interest-free purchases and low-interest credit offers are popular, they don’t suit everyone. Short-term benefits may be good, but consumers also need to consider the long-term costs of these kinds of offers, particularly ongoing fees and potentially high interest rates.

‘Promotional credit offers may encourage you to buy more than you can afford, and if you get into financial difficulty down the track and cannot pay off your purchases within the interest-free period, you could find yourself in hot water,’ she said.

‘Spend time checking the fine print and you’re likely to find that many of the low or no-interest credit deals on the market are not that advantageous. While ‘bonus’ credit may be interest free, these loans contain fees and charges and remain very expensive forms of credit.’

‘The bottom line is that interest-free terms and low-interest credit offers are not designed to help you save, they encourage you to spend more,’ Ms Rickard said.

Interest-free terms are offered by many department stores on purchases made with store credit cards for up to 48 months, but they may also charge establishment fees, often around $25, as well as monthly transaction fees, typically at around $2.95.

‘It’s also worth noting that purchases under $1,000 are disproportionately affected by these establishment fees and monthly fees. When added to the price of purchase, fees imposed for interest-free terms may equate to a much higher rate of interest on the purchase than if a standard credit card was used - possibly in excess of 20 per cent,’ Ms Rickard said.

Ms Rickard reminded consumers that purchases not paid off within the interest free period attract very high rates of interest, sometimes as much as 27.99 per cent compared with the interest rates on standard credit cards of between 10-19 per cent.

ASIC also suggests consumers be wary of ‘cash back’ credit card offers and low-interest balance transfers. Cash back benefits may be outweighed by extra interest charges if the card offering the cash back has a higher than usual interest rate. This is particularly applicable to consumers who don’t pay the whole balance off each month.

‘Consumers who don’t pay their credit cards off in full each month are generally better off having a low-interest credit card,’ Ms Rickard said. ‘Extra features that come at the cost of higher interest rates are generally not worth it.’

Ms Rickard said a number of financial institutions offer special credit card ‘balance transfers’, whereby the consumer, in applying for the new credit card, is able to transfer outstanding balances from other credit cards at a very low interest rate. Typical offers include 0 per cent for six months, or 5.99 per cent ‘forever’.

‘Consumers need to be mindful that discount rates only apply to transferred balances. This means new purchases will attract the full interest rate applicable to the credit card anywhere between 11-20 per cent and may not have the benefit of any ‘interest-free days,’’ she said.

‘The loss of an interest-free period means that such ‘balance transfer’ offers will be of most benefit to consumers who elect not to make any new purchases on the card. However, the fact is, that balance transfer offers are designed to encourage you to take out a new card and use it, and some providers may even charge a fee if you don’t,’ Ms Rickard said.

Other credit risks to look out for include:

• Credit cards with a cash withdrawal facility
• Did you know that unlike purchases, cash advances have no interest-free period and often incur ATM fees?
• Interest-free deals that involve getting a credit card
• When a consumer makes a purchase on interest-free terms, a card is usually provided with a credit limit that is higher than the purchase amount. Consumers can use the card for other purchases and for obtaining cash, but any new transactions will probably not attract interest-free terms. Remember that these kinds of cards usually attract establishment fees (around $25), monthly fees (typically at $2.95) and extremely high interest rates (up to 27.99 per cent for cash advance and non-interest-free purchases.
• Reward schemes with high annual fees
• Credit cards may offer rewards schemes, but you may have to pay high annual fees as well as higher than usual interest rates. In many cases, the fees and interest rates outweigh the benefits available from reward points, particularly if you’re not a big monthly spender or don’t pay off the full balance each month.
• Look carefully at the rate of exchange of points for rewards. Changes in recent years mean that some award schemes have become significantly devalued.

ASIC’s consumer website, FIDO at www.fido.gov.au, provides information about credit as well as a wide variety of savings and investment tips.

End of release

On our consumer website FIDO, read our tips about:

• Managing your money
• Dealing with debt
• Managing your credit card