This article was published on 11 June 2005. Some information may be out of date.

Q&As

  • Paying extra for using a credit card.
  • Distortions when considering how good an investment your home is.
  • First home buyers should probably wait.

QI note with some concern that some businesses add an extra couple of per cent to the price of their products if one chooses to pay by credit card.

I know the business is charged a percentage fee for the credit facility by the bank, and the business is passing on the costs to their ‘valued’ customers. But as I see it when paying by credit card I am offering the business my bank’s guarantee that it will pay the business my money, and for that guarantee the business is charging me more!

I know I have the option of purchasing elsewhere, but if I choose to buy that business’s product, and by credit card, then do I have the right to require the business to sell without the credit card fee?

AYou can always try. But you might not get far.

It’s not against the law to charge extra, “provided the customer knows what is happening before the deal is struck,” says Consumers’ Institute chief exec David Russell. “The only legal tender in New Zealand is cash. Other payments are by agreement.”

He adds that merchants’ agreements with credit card companies usually prohibit the merchants from adding an extra charge if a customer uses a credit card, but often that isn’t enforced.

“The consumer can contest it. If the trader sticks to their guns, the consumer could get in contact with the card issuer.” But are you going to bother?

Alternatively, you could try your argument about offering the business a guarantee. But I don’t like your chances of convincing the trader. If a business really valued that guarantee, surely it would offer people a discount for using a credit card, rather than charge more.

So what should you do if a shop charges extra for card use, and you can’t find an alternative supplier that doesn’t?

Generally, you’re better off paying by cash, cheque or EFTPOS, even though you lose the free credit for up to 55 days.

Let’s say you’re buying an appliance for $1000. If you use your credit card, and time the purchase so it’s right after the last date on your billing cycle, you won’t have to pay for 55 days.

In a bank, you might earn 6 per cent on that $1000, which comes to $9 over 55 days, or only around $5.50 to $7 after tax, depending on your tax bracket. And if you buy at any other time in the billing cycle you’ll get less. The extra charge for using the card will probably eclipse that.

What if your card includes a loyalty scheme?

As a general rule, when you use such a scheme it amounts to getting roughly a 1 to 1.5 per cent discount, says Russell.

If you use the points for flying, it’s harder to say, as there is so much variation in fares and programmes.

“Still, generally we say, ‘Don’t buy air fares or any service or product based on loyalty points. If you get them, treat them as a bonus’,” he says.

All in all, it’s possible that the free credit plus loyalty points will make it worthwhile to use a credit card even if you pay extra. But the extra would have to be pretty small.

QGood column two weeks ago about whether owning your own home is always a good move financially.

People make two major mistakes when evaluating residential property as an investment option.

First, they overestimate the likely capital gain, because they rely on published property sale price statistics. These include new houses, and since the average new house is bigger than the average existing house, this produces a chronic upward skewing of the statistics.

Furthermore, the statistics do not reverse out the massive amount of improvement money spent on the average house over the years, which gives a false impression for any house that does not have improvements.

Personally, I think even your Scenario B “inflation plus 2 per cent” price rise assumption is more than people should work on if they don’t intend improving their house.

For example, I have recently shifted and know that the previous owner made a net capital gain of 3 per cent over the roughly 18 months he owned the house. That’s roughly inflation minus 1 per cent during a period when house prices were allegedly “booming”. And this is Takapuna we’re talking about, not Otara.

Second, people generally seriously underestimate the massive accumulated costs of rates, insurance, general wear and tear, and the occasional major DIY project such as painting inside and out, new roof, new bathroom, new kitchen, new driveway, or new fences.

I believe interest costs and repair/refurbishment/improvement costs in particular will kill most residential properties as investments — especially at the current rental yields.

AI agree with most of what you say. Statistics certainly are distorted by the increasing size of houses.

And, when people compare their buying and selling prices, they often forget how much money they’ve poured into their house over the years.

However, I think the word “kill” is too strong in your last sentence. If prices are stagnant for a while, houses will probably become inferior investments. But they won’t die.

Your comment about Takapuna versus Otara is interesting. Certainly house prices grow more in some areas than others, but generally people are not good at picking growth areas until after the fact. They are certainly not necessarily always the “desirable” suburbs.

Anecdotal evidence suggests, in fact, that prices in more expensive areas are more volatile, rising more at times but also falling more at times.

QWe are saving to buy our first home. At present we have around $15,000 saved, and we are looking to purchase a house in the $250,000-$280,000 range.

We are currently living off my salary while saving any monthly surplus from my husband’s business. This equates to around $1500 savings per month.

Are we best off continuing to save for another 12 months to accumulate a bigger deposit while paying rent ($250 per week)? Or would we be putting ourselves in a better position by getting into the property market now with a smaller deposit and taking on a bigger mortgage without wasting money on rent?

We could cope with a mortgage repayment of more than the $250 rent we are paying, but don’t want to be forced to spend most of my income on mortgage repayments.

AGenerally it’s not wise to try to guess what’s going to happen in share or property markets. People get it wrong so often, and in the meantime they are not getting on with what they want to do.

But the current situation is unusual. As BNZ chief economist Tony Alexander pointed out recently, rents have risen just 9.4 per cent in the last five years, while house prices have risen 67 per cent.

“What is the probable scenario from here?” he writes. “Rents rise 58 per cent in the near future, or prices flatten out and probably fall? Given the evidence of a growing oversupply of property it is hard to see an upward rents adjustment in the near future.”

In other words, prepare for house price falls.

I’ve pointed out, over the last two weeks, that in some periods renting is better financially than home ownership. The next few years could well be one of those periods. If I were you, I would wait a year or two.

Since Michael Cullen presented his Budget, there’s another issue here, too. Under his proposed KiwiSaver plan, buyers of first homes are the big winners.

We’ll assume your income is not above the maximum — which is likely to be $100,000 for couples.

If you’re willing to wait five years before buying, the two of you could receive $6000 towards your deposit — per kind courtesy of the rest of us taxpayers. If you wait seven years, you could get $10,000.

It’s a long wait. And if Labour loses the election, the scheme may not happen. But you might want to delay your purchase at least until the KiwiSaver situation is clearer.

By the way, don’t get too hung up on the idea that you’re wasting money on rent. You are buying accommodation. If, instead, you were repaying a mortgage on a home that was losing value, you would be paying much more for accommodation.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. 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 protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.