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SELECTING THE CORRECT CREDIT CARD 7/2/2007

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SELECTING THE CORRECT CREDIT CARD
COSTS OF A CREDIT CARD
KNOW YOUR RIGHTS
PROTECTION AGAINST FRAUD

SELECTING YOUR CREDIT CARD

Consider the reasons for which you need the credit card.

Shop around for the best plan that fits your needs.
If you will pay the full amount on time, look for the best rate and the lowest fees.

Make sure that you understand the terms and conditions of the credit card before you sign.
Have an officer of the lending institution explain the details to you and get them to sign the terms and conditions that they have explained.
Look at the ‘fine print’ in the agreement and ask for an explanation of any words or terms that you do not understand.

Do not be ‘sucked in’ by ‘fly buys’ and other ‘bonus’ shopping free points. You eventually pay
for these so called bonuses … if you ever get to cash them in. Remember the airlines that went into receivership … leaving their customers with thousands of useless ‘free points’.

Ask: is there an application fee;
what is the annual fee;
what is the ‘late’ fee;
is there a fee for being over the limit;
what other fees are there;
is there an introductory ‘low’ interest rate;
after the introductory rate, what will my new rate be;
when and how can the rate be changed;
what happens if I go over my limit;
what happens if I have problems paying my bill;
what is the number of free days before interest is charged;
what interest rates and fees are charged on ‘cash advances’;
what penalties are imposed if you do not pay on time;
what credit limit is being offered to you;
what credit limit do you need;
what credit limit can you afford;
where will your credit card be accepted.

CHECK YOUR CREDIT CARD STATEMENTS FOR THE FOLLOWING

Keep your receipts to reconcile to your statement.
Be sure that your payments have been correctly credited to your account and on time.
Check for errors on your statement: incorrect entries and entries appearing more than once.
Check for incorrect fees and charges.
Check for charges for unsatisfactory goods or services. Ensure these are deducted from your statement.
Immediately notify the card issuer of any discrepancies.
Follow up your telephone call with a notification in writing.
A ‘registered’ letter costs only a few dollars and provides ‘proof’ that the letter was sent and received.

PROTECTIVE MEASURES FOR YOUR CREDIT CARD

Sign your card as soon as you receive it.
Keep a list of your credit cards, numbers and card issuers’ telephone numbers.
Keep these numbers separate from your credit cards.
Try and cover the keystrokes when you enter your PIN number at an ATM.
Do not leave your receipt at the ATM.
Do not give your credit card number over the telephone unless you made the call.
If anyone calls you, especially after you have just given your credit card details over the phone,
and tells you there was a problem with your number and asks you to repeat it, ask them to first
read you the numbers that they have.
Be certain to get your card back after you make a transaction.
Be certain to personally destroy any cancelled sales receipts.

KEEPING YOUR DEBT LEVEL AS LOW AS POSSIBLE

Always make more than the minimum required payment if possible.
Pay your bill promptly so that you do not incur additional interest and fees.
You will save money by paying off your credit card debt as soon as possible .. otherwise your
debt grows and grows and the interest mounts and mounts.
Do not forget that you are being charged a high rate of interest on your credit card balance.
Remember that this can be an expensive way of buying goods.

Be aware of all the fees and charges that get added to your credit card balance ... they add up.
Remember that there are usually additional fees and charges for late payments or for making
less than the minimum payment.

Be wary of credit card offers of low introductory interest rates.
Check the interest rates that will be applied after the ‘introductory’ period.
These rates may be higher than you currently pay.

If you cannot afford the repayments on your card, do not buy anything that is not absolutely
an essential item and still think about whether you can survive without it.

Remember that a record is kept of your payments and how often you are ‘late’ and ‘below’
the minimum required payment, therefore a good payment record is important for your credit rating.

BE WARY OF CASH ADVANCES

Use your card for cash advances only when absolutely necessary.

Higher interest rates and fees are applied to cash advances.

Most card issuers charge interest against a cash advance until the balance of your card is paid out in full.
This means that if you had a cash advance of $200 and your balance owing was $2,000 and next month you paid $1,900 off your card, you would still be charged interest on the $200 cash advance.
If you always have a ‘balance owing’ for the next 5 years, you will still be charged interest on the $200
cash advance and any other cash advances.

The cost of a cash advance can become exorbitant as you will continue to be charged interest.

HOW THEY CALCULATE YOUR INTEREST

The main methods used:

Average Daily Balance: they calculate the average balance for each day in the period and charge interest against that average balance and multiply the result by the number of days in the period.

Adjusted balance: they start with the closing balance from the previous period, add new charges and subtract any payments, then calculate the interest for the period on that adjusted balance and multiply the result by the number of days in the period.

Previous balance: they calculate interest on the closing balance from the previous period, regardless of any payments or charges made in the new period and multiply the result by the number of days in the period.

Two-cycle balance: sometimes they use other methods such as using your last two month’s activity to calculate interest.

If you do not understand how your interest charges are calculated, ask your card issuer for an explanation.

SPECIAL DELINQUENCY RATES

Certain card issuers that have low rates for on-time payments also have a very high rate if you are late with your payment.
Make sure that you understand these conditions relating to your card.

DISPUTING A CHARGE OR TRANSACTION

You can dispute charges that appear on your statement.
Write to the card issuer and to the creditor.
Include your name, account number, address and telephone number as well as a description of the error.
Do this immediately that you discover the error.
Your complaint should be acknowledged in writing.

UNAUTHORISED CHARGES

You can be held responsible for the use of your card, even without your permission.
If you report a lost or stolen card, you cannot be held responsible for any charges that occur after the time of
your reporting the loss or theft.
If a thief uses your card before you report it lost or stolen, you may be held responsible for those charges.
Report any loss or theft as soon as you become aware of the loss or theft.
Make sure you record the time and date of the report and follow up with a confirming letter.

TRANSACTION FEES and OTHER CHARGES
A card may include other costs. Some issuers charge a fee if you use the card to get a cash advance, make a late payment, or exceed your credit limit. Some charge a monthly fee whether or not you use the card.

FOREIGN CURRENCY LOANS - ALERT – ALERT – ALERT

BORROWING IN FOREIGN CURRENCIES CAN BE VERY DANGEROUS
THIS PRACTICE HAS BANKRUPTED THOUSANDS OF BORROWERS
YOU NEED TO HAVE OVERSEAS BUSINESS DEALINGS
DO NOT BE ‘SUCKED IN’ BY THE LOWER INTEREST RATES STORY

WHAT IS A FOREIGN CURRENCY LOAN ?

A foreign currency loan is a loan that is arranged in a currency other than the currency of your own country.
i.e. you live in Australia and borrow $200,000 dollars but wish to have it converted to US dollars rather than keep it in Australian dollars.

Assume that two Australian dollars equals one US dollar and you wish to borrow $100,000 US dollars. You need to
borrow $200,000 Australian dollars which is converted to $100,000 US dollars.

When you pay back the loan you will have to pay back the equivalent of $100,000 US dollars.

You can only hope that the US dollar has not increased in value against the Australian dollar or you may have to pay back more than the $200,000 Australian dollars to equal the $100,000 US dollars.

WHY BORROW IN A FOREIGN CURRENCY ?

1. People borrow in foreign currencies because the interest rates are lower in that foreign country.
In the late 1980’s the interest rates in Australia were around 20% + but in Switzerland they were only at around 6%.
The Swiss franc was equal to the Australian dollar and the borrower stood to save massive amounts in interest
i.e. around 14% ($14,000 per $100,000 borrowed).
While this appears attractive, it can be extremely dangerous for the average borrower, as we shall see.

2. Businesses trade in foreign currencies.
They speculate that the value of the currency will ‘increase’ or ‘decrease’ within a certain time period just as people speculate that shares or property will ‘increase’ or ‘decrease’ within a certain time period.

They hope to make a ‘profit’ on the increase or decrease of one currency against another currency.

3. Businesses borrow in foreign currencies because they buy or sell goods or services in those foreign countries.
When it comes time for them to pay for those goods or services, the payment is made in the currency of that foreign country unless it has been stipulated that it is to be made in the currency of your choice e.g. US dollars.

Example : Business A (in Australia) orders US$100,000 of goods from Business B (in the USA) with payment to be made
in US dollars.
Assume that Business A needs to borrow the US$100,000 to pay for the goods in US dollars.
Business A takes out a loan in Australian dollars (Aus$200,000) for 6 months until it is able to sell the goods
(hopefully for say $400,000 ) and receive payment for those goods. It will then be able to pay back the
Aus$200,000 loan (i.e. US$100,000).

WHAT ARE THE RISKS INVOLVED WITH BORROWING IN FOREIGN CURRENCIES ?

In the example quoted, assume that before the 6 months expires the US dollar increases in value against the Australian dollar
and is now worth three Australian dollar instead of two, i.e. it takes three Australian dollars to repay one US dollar.

Now, Business A in Australia must repay $300,000 Australian to repay the $100,000 U.S. dollar loan.

Business A in Australia has effectively ‘lost’ $100,000 Australian on the transaction.
HOW CAN A BORROWER AND BUSINESSES TAKE ACTION TO ELIMINATE THIS RISK ?

1. HEDGE
A borrower can ‘hedge’ (i.e. insure) against the risk of their currency falling in value against the foreign currency in which they have borrowed … but … the cost of ‘hedging’ is approximately the ‘difference’ between the interest rate in the foreign currency and the interest rate in your home country.

Example: Assume that the interest rate for borrowing in the United States is 7% p.a. and in Australia the interest rate for borrowing is 11% p.a.
In simple terms, the ‘hedging cost’ for the risk of borrowing in US dollars is 11% - 7% = 4% (which is the ‘savings’ in interest).

There is no benefit to be obtained by borrowing in U.S. dollars to obtain the lower interest rate (the cost negates the savings).
This is for businesses that wish to ensure that they will not be affected by a fall in the value of one currency against another currency when they either have to receive payment or make payment in a foreign currency in the future.
They are not looking for a ‘saving’ in interest but are looking to protect themselves from a fall in the value of their own country’s currency.

It is similar to arranging today to buy a house in 6 months. The sale price of the house today is $500,000 and you make an agreement today to pay $500,000 in 6 months (probably for a fee ) rather than take the risk that the price in 6 months may be $600,000 because of an increase in property values.

2. NATURAL HEDGE
A business / borrower has both income and expenses in a foreign currency that can be offset against each other so that if one currency falls in value against the other currency the ‘loss’ from the falling currency will be offset by the ‘gain’ from the other currency

Example: Business A (in Australia) sells goods in the United States for US$1,000,000 and buys goods in the United States for US$1,000,000.
Currently one US dollar equals two Australian dollars.
i.e. the receipts of US$1,000,000 will be converted to Aus$2,000,000 and
the payment of U.S.$1,000,000 for purchases will cost Aus$2,000,000.

If the Australian dollar falls in value against the U.S. dollar so that one US$ = three Aus $’s,
the receipts of US$1,000,000 will be converted to Aus$3,000,000 and
the payment of US$1,000,000 for purchases will cost Aus$3,000,000.

What the business ‘loses’ on the one hand, it ‘gains’ on the other hand.

In this situation there is a ‘natural hedge’ created. We are really speaking of ‘foreign exchange’ gains or losses here, as opposed to ‘foreign currency loans’. The principals are basically the same.

If a business is to rely on a ‘natural hedge’ in foreign exchange dealings, its income and expenditure in the foreign currency should be approximately the same amounts … otherwise … it should be looking to either ‘hedge’ or take out ‘future’ contracts.
This does not work for the average ‘home loan borrower’ or business that does not have ‘other transactions’ to offset.

3. FORWARD CONTRACT
A business that is to receive income or make payments in a foreign currency at a later date may purchase what is termed a ‘forward contract’ in their ‘home’ currency or another currency.

This involves buying a certain amount of a ‘future currency’ of your choice at a predetermined value against the other currency (i.e. paying a fee) to ensure that when you receive your payment (or make a payment) in a foreign currency it will be converted into the currency of your choice at today’s rate or at a given rate. You are guaranteed to receive a certain amount in the currency of your choice regardless of what happens to the value of the currencies involved.
Example: Currently one US dollar equals two Australian dollars.

Business A (in Australia) buys goods in the United States for US$1,000,000 and is expected to make payment in 6 months.
To ensure that Business A pays only Aus$2,000,000 (i.e. the amount of Aus$2,000,000 will be converted to US$1,000,000)
Business A needs to guard against a decrease in the Australian dollar against the US dollar.
If the Australian dollar falls in value against the U.S. dollar so that one US$ = three Aus $’s,
Business A would have to pay Aus$3,000,000 which would be converted to US$1,000,000.
Business A can purchase a ‘forward contract’ from a third party that will ensure, regardless of any change in the value of the Australian dollar, that it will pay only Aus$2,000,000 to cover the U.S.$1,000,000 debt in 6 months.

LENDERS WILL NOT BORROW IN FOREIGN CURRENCIES WITHOUT ELIMINATING THE RISK.

A lender will not borrow on your behalf in foreign currencies without either ‘hedging’ the risk or taking out a ‘forward contract’ to eliminate the risk of one currency’s value falling against the other currency’s value, as that lender would ultimately be responsible for any ‘losses’ that could not be met by their customers.

Although the lender will have security from the borrower it will always ‘insure’ against possible losses suffered as a result
of one currency falling in value against another currency.

The borrower will ultimately pay the costs of eliminating the risks. If the costs are not specifically stated, they will be built into the pricing of the transaction.

HOW DID SMALL BUSINESSES, PROFESSSIONALS AND FARMERS LOSE IN THE 1980’s ?

In the 1980’s in Australia, when interest rates were 18% for home loans and up to 25% for business loans and overdrafts,
literally thousands of farmers, small businesses and professionals such as dentists, doctors and lawyers were enticed into borrowing in Swiss francs because of the lower interest rates ( 6% or so ).

They were to save thousands of dollars in interest on their loans and overdrafts, even hundreds of thousands of dollars.

They were not aware of the risks associated with these foreign currency loans.

If the Australian dollar ‘crashed’ against other currencies, especially the Swiss franc, they could lose everything that they owned.

Guess what … the Australian dollar ‘crashed’ … they lost everything.
These people were bankrupted … businesses were ruined … families were destroyed … tragically, suicides occurred.

EXAMPLE:
Interest rates in Australia = 20%
Interest rates in Switzerland = 6%
Saving on interest = 14%
Amount borrowed = $1,000,000
Term of loan = 5 years
One Australian dollar = One Swiss franc

Australian bank arranges $1,000,000 loan for 5 years and converts it into Swiss francs equivalent amount.
Australian bank takes a mortgage over property, in Australia, valued at $1,300,000 (Australian dollars).

Savings in interest to the borrower = $140,000 per year ( i.e. 20% - 6% = 14% X $1,000,000 ).

After only 12 months the Australian dollar falls in value by 50%. Now you need 2 Australian dollars to equal 1 Swiss franc.
You need $2,000,000 Australian dollars to repay the 1,000,000 Swiss franc loan.

The bank realizes that they do not have enough security and calls for more security from the borrower, such as :
‘We need $2,600,000 in security … please provide other security worth $1,300,000 to go with the $1,300,000 of security that we already have or we will demand that you pay back the loan’.

Most of the borrowers could not provide the additional security … the banks demanded that the loans be repaid in full.

The borrowers now owed $2,000,000 Australian dollars rather than the original $1,000,000 they borrowed.
They had saved $140,000 in interest but they had lost $1,000,000 on the loan, i.e. a net loss of $860,000.

The banks took their security from the borrowers and sold it under a ‘mortgagee-in-possession’ sale.

The borrowers had lost their assets which were sold by the banks and they still had debts … they were bankrupted.

HOW COULD THIS HAPPEN ?

If the lenders would not borrow on a customer’s behalf without ‘hedging’ the risk or taking out a ‘forward contract’ to eliminate any risk, how did the lenders actually lose the $1,000,000 when the Australian dollar fell in value ?
The lenders should not have suffered any losses.

I should add that when a lender takes the appropriate action to cover their ‘borrowing risks’, it is normal practice for the customer to be ‘charged’ with the costs of such actions. These costs would normally be included in the pricing of such transactions.

I have already stated that any prudent lender would not borrow in foreign currencies without eliminating the risk.

Major lending institutions have strict guidelines for lending and borrowing by their treasury and corporate departments.
These guidelines are closely monitored and enforced by their credit departments.

Author Name
Kevin Nowland -

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