Your Money & You – June 2011

Get the facts on interest free

Many large department stores advertise that you can buy things such as TVs, fridges and sofas using interest free deals.  Be careful with these deals – 'interest free' doesn't mean 'fee free' and these deals can leave you more out of pocket than you expected.

Interest free deals let you have the TV or fridge and pay for it later, either by regular monthly instalments or at the end of an interest free period.

While a store may advertise that 'you don't have to pay a deposit, there is no interest and there is nothing to pay for 18, 24 or even 26 months', in most cases you will still be charged fees.  These could include an establishment fee, a monthly service fee and a late payment fee.  Before you sign anything, ask about all the fees and charges so you can work out exactly how much you will have to pay back.

ASIC has developed a free mobile calculator that you can use on your smart phone to help you work out how much an interest free deal will really cost you.   Try it next time you are considering buying something that is advertised as interest free.  Visit http://m.moneysmart.gov.au on your mobile phone and save it to your bookmarks or homepage so you can access it in-store.

Let's look at an example of how the mobile calculator works.

Maya wanted to buy a new 3D television.  She visited a store and they told her she could get the TV for $2,300 on an interest-free deal for 18 months.  Maya asked the salesperson what the fees were, and found out there was a $25 establishment fee and a $12 monthly service fee.  She used the MoneySmart mobile calculator and realised she would have had to pay $141 in fees, which was equivalent to an interest rate of 13.6%.

Here are some tips for managing interest free deals.

Watch out for the end of the interest free period
Credit providers are not obliged to remind you when the interest-free period is due to run out, so you need to keep on top of this yourself.  If you fail to repay the total amount owing on your purchase by the end of the interest-free period, your credit provider will start charging you interest.

The interest rate charged could be very high - up to 30%, and often much higher than standard interest rates on credit cards which average between 12-20%.  So always aim to repay the debt early.

Beware of store cards
Sometimes a retailer will give you a store card with your interest-free deal.  You may be tempted to use it to buy more goods on credit, but this is often not a good idea as store cards usually have higher interest rates than regular credit cards and any purchases you make with the store card will not attract the interest-free terms you signed up for.

The store card will also often have a credit limit that’s higher than the value of your interest-free purchase.  Ask for the limit to be lowered to the amount of the debt, that is, the full purchase price.

Once you have paid off the interest free deal, write to the credit provider to cancel the store card. Then you won't be tempted to use it for more purchases.

The minimum monthly payment is often not enough
If you’re paying by instalment, the minimum monthly payments suggested by the retailer who signs you up for the deal are often not enough to pay off the full purchase price before the interest-free period runs out.  This means you may be left with a large outstanding amount to pay at the end of the interest-free period.  Make sure your agreed repayments are enough to pay off the full amount within the interest-free period.

Is an interest free deal your best option?
Explore all your purchasing options before you sign up for an interest-free deal.   You may be better off saving up to buy the item instead, or buying the goods on lay-by.  If you lay-by, you will have to wait until you’ve paid your purchase off in full before taking the item home, but you will save money in fees and interest.

For more information about interest free deals visit ASIC's consumer and investor website, www.moneysmart.gov.au or call 1300 300 630.

My last article
This is the last article from me for the services newspapers as my term as ASIC Chairman ends in May 2011. It has been a pleasure working closely with the ADF on a number of issues and I'd like to take this opportunity to thank all ADF members for your questions and topic suggestions for this regular article.

I'd also like to thank everyone at the ADF Financial Services Consumer Council for their ongoing work in helping ADF members manage their money and for partnering with ASIC on many projects. It's some of the best work we do.

The new ASIC Chairman, Mr Greg Medcraft, will be contributing to the service newspapers from June 2011. I know he will enjoy working with the ADF as much as I have.

E-mail ASIC with topics that interest you via feedback@asic.gov.au.

Tony D'Aloisio BA LLB (Hons)
Chairman
Australian Securities and Investments Commission

Recognising and Avoiding Investment Risks

In our last newsletter we discussed how most individual view risk when it comes to investing to how investment professionsals view risk.
We pointed out that investment professionals see risk as a measure of how variable returns are from year to year during an investment period.
This month we’ll look at some different types of risk that arise when someone invests and how those risks might be reduced.

• Volatility – in simple terms this is a measure of the variability in returns for a particular investment.  The higher the return an investor wants then the higher the level of volatility they’ll often have to accept.The chart below helps investors to choose a portfolio that gives them the best return for their level of risk tolerance.

• The chance of investment loss – even investments with very low risk can suffer investment losses during certain timeframes.  That said, higher risk and higher return investments are more likely to have their negative periods but are also likely to have a higher overall outcome.An investor who appreciates this is recognises the need for patience and the need not to over-react to losses during a short period of time.

• Euphoric moods – it can be dangerous to invest when many investors are in a euphoric mood and prepared to pay higher and higher prices for assets.  Financial crises will occur in the future so it may be best to build up a core of safe assets which help protect during the next crisis.
• Inflation risk – returns adjusted for inflation are nearly always lower than nominal returns; on an inflation adjusted basis some returns may even be negative.  The chart below shows that shares and property have generally provided good protection against inflation when it increases from negligible to moderate levels and when it is slowing.  However shares and property don’t do so well when inflation is high.

Beware: Scam phone surveys which leads to other scam calls

SCAMwatch (www.scamwatch.gov.au) is warning Australians to be alert to scam telephone surveys which gather your personal and banking information and use it to make future scam phone calls you receive appear legitimate.
How the scam works

• You receive a call out of the blue from a scammer who pretends to be conducting a legitimate telephone survey.
• The scammer may claim to be from a genuine research or survey company or calling on behalf of a bank/financial institution.
• Scammers often only ask a small number of questions, usually two or three.
• Questions may focus on the bank or financial institution you use, whether you are happy with their service, and if you would consider changing banks.
• You may also be asked which branch you opened your account at. Once the scammer knows your branch they can use it to find the BSB number which will often make up the starting digits of your bank account number.
• Within a few weeks you may get a second scam call.
• The second scam caller may try to convince you that they are legitimate by using the personal details you gave them during the telephone survey. They may seem convincing because they know which bank you are with, which branch you bank at, and the starting digits of your bank account number.
• Scammers may quote the starting digits of your bank account number and then ask you to provide the remaining numbers.
• The call may be an overcharged bank fee reclaim scam or any other scam which tries to steal your money and your personal and financial details
• Don’t give your personal, credit card or account details over the phone unless you made the call and the phone number came from a trusted source.
• If you think you have provided your account details to a scammer, contact your bank or financial institution immediately.

Report
You can report a scam to the ACCC via the report a scam page on SCAMwatch or by calling 1300 795 995.

Free Seminars anywhere in Australia

The ADF Consumer Council provides financial education at Initial Training, Force Preparation, Post Deployment, Leadership Training, During Career and Transition, many of which are components of ADF training programs. The Consumer Council is happy to provide expert speakers free of charge on a range of financial topics to any ADF unit in Australia.

For more information contact us via our website (www.adfconsumer.gov.au).