Prime borrowers start to default - US

In the US, the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

This new trend signals more bad news for US banks. Rising delinquencies on prime mortgages helped drive the total delinquency rate to a record 9.24 per cent in the second quarter of this year, according to the Mortgage Bankers Association. The data reflect loans that are at least one payment past the due date.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These borrowers tend to have fewer financial levers to pull to stay ahead of their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have already worked their way through the financial system, causing billions of dollars in losses to the nation's banks.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them, since it is harder to tap the equity in their homes to pay their bills if they lose their jobs.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money.

(Source: The Australian, from an article published in the Wall Street Journal)

Rates on credit cards not coming down

Rates on most Australian credit cards have not budged despite the Reserve Bank (RBA) slashing cash rates by 3 per cent since September.

Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.

According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.

Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.

ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.

Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.

Debt is no laughing matter

Make low-interest-rate cards work for you

You can look at credit cards in all sorts of ways but typically they all fall into two major categories;

1. Interest free period and high interest charge cards
2. No interest free period and lower interest charge cards

If your current finacial situation doesn’t allow you to pay off your credit card in full each month, and you’re using the first type of card, then you need to look closely at swtiching. This is particularly important if you think your current financial downturn might be protracted. Why pay a higher interest rate on credit that is revolving each month when you could be paying a much lower rate?

There are a number of low-rate cards are on the market which have interest rates up to 9 per cent lower than the higher rate cards currently charging 18 to 20 per cent.

Balance transfers

A number of providers also offer even lower rates for the first six months or so on balances you transfer from another card. Like credit cards, balance transfers can also be placed into 2 important categories.

1. Reduced “introductory rates” for a set period (say 6 months) then interest charges revert to the standard credit charge that appies to that particular card
2. Reduced rates for the life of the balance transfer.

If you do decide to take advantage of the second type of card, offering a reduced rate for life of balance of transfer, you should consider not using this type of card for additional purchases until the debt you transferred is fully paid out. The cards offering this type of payment arrangement usually don’t have lower rates. Typically you will find that while the interest you pay on the balance transfer will be around 7 per cent (currently), the charge for additional purchases is likely to be around 20 per cent. But here’s the catch, the payments you make go to reduce your original balance transfer amount. New purchases and interest accrue and attract further interest at the higher amount.

In general, if you’re not able to pay your credit card each month switch to a lower rate card. If you think you’re still going to need to use your card for purchases now and then, go for the introductory low rate. If you can avoid using your card while paying off the balance transfer from your old card – consider the low rate for life of balance transfer type but don't ever use it for new purchases.