Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.
NZ Herald 22 August 2015
Q&As: Banks give teenagers credit too easily
- Credit union offers lower-interest deal to credit card borrowers
- Retiree "invests in people"
- 55-year-old spending while she's able
- Financial adviser struggles with how others do it
Question: A few years ago my daughter entered the workforce in a relatively modestly paid job.
She applied for and got a credit card with a limit of $500 and within a year or so she excitedly told me the bank had sent her an unsolicited letter increasing her amount to $10,000.
I was horrified, but fathers know nothing to teenage daughters, and I sneaked into her room and watched the balance grow to $10,000 over a couple of years. My father passed away and I gave my children $10,000 each and she paid off the bank.
A friend of mine was much smarter. His daughter went to university, got the credit card with a $500 limit, and the bank then increased this to $10,000. She had no job.
She hit the limit of $10,000 and the bank demanded repayment. My friend was alerted to his daughter's plight and told the bank to, "Bankrupt her, and she will be out of bankruptcy in a couple of years, and a good lesson to both of you."
The bank quickly capitulated and did not want publicity and said, "Look she has bought stuff. If we forgive all the interest would you pay for what she purchased?" He agreed.
Banks are disgraceful to inflict this on young people, and this may be helpful to your readers.
Answer: Generally the rule is "caveat emptor", which means, "Let the buyer beware". While a bank might give you a credit card, you don't have to use it. But pushing such high credit at teenagers - or for that matter anyone - does seem over the top. And "pushing" feels like the right word here.
Perhaps if more people tried your friend's tactics, banks might slow down.
By the way, did you really have to sneak into your daughter's room? I don't blame you for worrying, but we've got to be straight with our kids if we want them to be straight with us.
Thanks for writing, though. It's a good warning for others.
Question: I read with interest your correspondent's letter two weeks ago and your reply about his/her credit card issues.
At the risk of being blatantly self-promoting, I manage a credit union whose sole purpose is to improve people's financial wellbeing. We've been running a campaign for almost two years now where we offer to refinance store and credit card debt at half the interest rate they are currently paying.
The resulting individual successes are truly amazing, as people finally discover that life doesn't have to be so tough financially.
Answer: Great idea. Given that many credit and similar cards charge around 20 per cent or more, you're still getting 10 per cent - as long as the person makes the payments.
And from their point of view, it makes a huge difference. If you're paying off a $2,000 debt at $50 a month with 20 per cent interest, it will take you five years and seven months, and you will pay total interest of $1323. At 10 per cent, it will take four years and one month, and your interest will total $443.
You added in a further email, "A far as I'm aware, we're the only credit union offering the solution, but it is something all of them could do."
"What we find is that in general terms, people don't know the rate being charged for this kind of finance. By converting it to a fixed term, they have certainty that they will pay it off, and we reduce their interest substantially.
"We also find that the biggest concern right now is the store cards when the cost of previous purchases come off the 'interest free' or 'repayment free' period and people are stuck with the 25 per cent-plus rate plus fees! With the 'free' periods going out to four to five years there is a definite disincentive to repay debt and it just keeps mounting up with each purchase."
Take note, readers!
To take advantage of your offer, a person has to join the credit union. Start by going to www.nzcuauckland.co.nz/loan-application.
Another thought: some readers may have a family member willing to pay off their credit card, and be reimbursed at a low interest rate. But everyone would need to work through, in advance, what would happen if payments aren't made. This problem could be helped by:
- Making compulsory payments easily manageable, with the option to pay more.
- Requiring the payer to make a commitment in writing, with both parties holding a copy of the letter.
- The payer setting up automatic transfers from a bank account.
A third option, of course, is to see if you can transfer to a credit card account that charges lower interest, not just for a limited period but permanently. For info on rates, see http://www.interest.co.nz/borrowing/credit-cards
A final point: If you're able to set up a plan to repay your debt at a lower rate, please don't let that be an excuse to borrow more. Borrowing to buy anything that doesn't increase in value is never a good idea.
Question: I'm a few years older than your 70-year-old retirees last week who are wondering how to organize and spend their investments. I've kept well clear of property for the very reasons you outline and spread my investments widely.
Rather than enjoying fine dining, luxury cruises, flash cars and the like - I do confess to indulging in concerts and theatre however - I've chosen to invest in people.
It started with my own children, years ago now, by giving them the best education money could buy and seeing them through university without the student-debt millstone. Now it's the grandchildren.
Invest in education through private school fees (it's cheaper than buying into the zones of the best state schools) and aim to avoid the student loans that can later inhibit family, housing and business aspirations.
Explore the options with both parents and children. To use the jargon: make sure that the investment is a hand-up, not a hand-out.
Once the grandchild options are well covered (for us there's 12 to consider), go for wider educational and health needs within New Zealand and overseas by making a careful selection of two or three reliable and effective charities. Invest in the children and young people they are seeking to help by hand-ups, not hand-outs.
Answer: That's hard to argue with, especially when you read the literature about how much happiness we can gain by giving. Retirees often say, "It's time to give something back," and do volunteer work as well as donating.
Just one comment: Many would argue that children can also get a really good education in state schools that aren't in high-priced zones, especially if the parents take an interest.
Question: Great article last week, Mary! I've felt a bit of a lone voice over the last few years as I've begun down the road of spending rather than saving.
That's not to say that financially I'm going backwards, but at 55 I feel comfortable enough with where I am to be able to really enjoy life by going out to dinner when I want, having overseas holidays several times a year, visiting friends and seeing places in the most far flung parts of the world, and not working more than a few months of each year.
The few months of contract work I do keeps me in touch with reality and provides enough income (taxed of course at the lowest rate with rebates available) to pay all the bills for the year - power, rates, insurance, medical etc.
I have several investments spread across different portfolios, which provide me with my spending money, and a freehold property to the value of near $2 million.
My friends can't believe that I am "always on holiday". But my response is, "What would I be saving it for? My old age, when I'm too old or too tired or too sick to do this stuff? I don't think so".
When I am too old, too tired or too sick I'll sell my over-valued property, downsize, and I think I'll still be financially ok.
And yes, I have had KiwiSaver since day one and have no expectation of any national super at 65. But I am looking forward to using my gold card when I get it!
Answer: Lately this column has been full of letters about people either spending too much on credit cards, or not spending enough. It's important for everyone to know which group they belong on - although of course there are also "happy mediums".
It sounds as if you've got it worked out. One warning: A lot of people who plan to downsize their house are disappointed at how much a smaller but low-maintenance, handy to transport, pleasant home can cost.
On the other hand, your expectations around NZ Super are too low. It might start at a slightly older age and it might be less than now. There's no knowing what a future government will do. But I'm sure there will be something there for you besides a gold card.
Question: My husband is an independent AFA (authorized financial adviser) with more than 25 years of banking background. He operates on a non-commission basis, charging a percentage of the total portfolio value.
He struggles with the poor quality legislation surrounding the profession. Particularly poor is the level of qualification required to operate as an AFA. He holds a tertiary qualification but is well aware there are many AFAs who operate with only a cert in financial services and no lengthy experience in any financial industry. They often lack communication skills and operate in an environment where certain "products" are sold and no independent advice is ever going to be offered.
The disclosure statement required from AFAs is often deliberately vague and never associates the AFA with a preferred provider.
Unfortunately the banking industry (a powerful lobby group) has no intention for the legislation to change dramatically. They have deliberately "dumbed" the industry down, with many well qualified AFAs being replaced with "figure head" AFAs who perform well in a sales environment but regularly hold a simple level 5 qualification.
My husband struggles with all the compliance the Financial Markets Authority requires of him and yet other operators can get away with churning portfolios to clip the ticket repeatedly, along with other dishonest practices. The industry can only be as good as the legislation that governs it, so hopefully there will be some good arrive from the submissions the government receives.
Answer: Great to know your husband works for fees rather than commission. And I agree with much of what you say: that low qualifications, lack of independence, and poor disclosure are all concerns.
It's probably also true that the government is under some pressure to retain the status quo on the regulation of financial advisers. But I've seen encouraging signs that the government realises big changes are needed. I've forwarded your letter to the Ministry of Business, Innovation and Employment. Thanks for playing your part in making that happen.
* Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.