Have I got a deal for you?
Pssst, want a fantastic deal? I may be able to get you into an investment with returns of just under 20 per cent a year, every year, after fees and tax. And it’s risk-free…
By now I hope you are extremely wary. This is classic too-good-to-be-true stuff. But hang about. It is true, in effect. Many credit cards have a 19.95 per cent interest rate. If you have run up long-term debt on such a card, all you have to do is repay that debt to improve your wealth as much as an investment earning 19.95 per cent.
How come? Well your net worth, which measures how well off you are, is made up of your assets minus your debts. So reducing your debts has the same effect as increasing your assets. More precisely, reducing 19.95 per cent debt is the same as increasing investments by 19.95 per cent.
This isn’t academic stuff. It’s real, in terms of dollars and cents available for you to spend now or in the future.
While I would hate to have high-interest debt, there’s one thing I envy about those who do. It’s so easy for them to decide what to do with any spare money, and so hugely rewarding.
And it seems people are increasingly realising that. Before the global financial crisis, in early 2007, New Zealanders were spending $1.10 for every $1 earned — presumably borrowing the rest. Now we’ve cut it back to spending 99 cents, according to ANZ executive Kerri Thompson.
As a result, consumer debt has dropped 6 per cent from December 2008 to February this year, she told the recent Financial Literacy Summit in Wellington.
But the Retirement Commission clearly wants more — and I fully support that.
In a particularly optimistic moment at the Summit, Retirement Commissioner Diana Crossan made a suggestion. Alongside the minimum payment on credit card statements, she said, customers should be told how long it will take to clear their debt if they make only minimum repayments, and how much total interest they will pay.
“Be the first to do it!” Crossan challenged credit card issuers. I hope she’s not holding her breath. It is, of course, in the interests of the credit card companies for customers not to realise just how much interest they pay.
Maybe I’m too cynical. Maybe one issuer will emerge as the “friend” of its customers — although giving the information Crossan wants is not likely to make customers love their credit card company. I suspect only regulation would make them comply.
The Retirement Commission probably stands a better chance of getting its message across via its current “dumb debt” campaign, and the tips and calculators on its www.sorted.org.nz website.
Dumb debt is the same as what I call bad borrowing. It’s running up debt to buy a product or service that you either consume shortly afterwards or that loses value. Most credit card purchases would qualify as dumb debt. The occasional work of art or vintage car might be an exception, but it’s generally too hard for amateurs to tell which ones are likely to gain value.
The interest rate on dumb debt is usually high. Some people who string out their repayments can end up paying twice as much as the purchase price. Even when it’s not that bad, if you don’t repay your credit card bill in full every month you’re throwing away money.
Whatever you are spending on — restaurants, clothes, travel, entertainment — you could have so much more of it, over your lifetime, if you just curb the spending for a while, repay the debt, and get into the habit of saving before spending.
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.