The Debts That Wouldn't Die!

Although there are over 1,300 differently branded credit cards available in the UK, the vast majority are issued by six big banks: Co-operative, HBOS, HSBC, Lloyds TSB, MBNA and Royal Bank of Scotland.

Hence, although you think that you've hundreds of very different credit cards to choose from, in fact, there are only a few dozen different "templates" which banks adapt to suit each new credit card or brand.

The best way to find out the nitty-gritty about your credit card is to look at its Summary Box, also known as the Honesty Box or Schumer box, after the Senator who introduced them into the US. This shows all the information which banks are obliged to reveal about interest rates, charges, repayments and so on. It's also where the real nasty stuff lurks, so you should always read the Summary Box before applying for a new card!

One piece of vital information which you'll find in the Summary Box is the minimum monthly repayment (MMR), which is the lowest payment that you must make each month. As I explained in The Day That Credit Cards Turned Nasty, MMRs used to be a tenth (10%) of the outstanding balance, which cuts your debt to zero over a reasonable period.

However, when American credit-card issuers set up shop in the UK in the early Nineties, they launched cards with minimum monthly repayments of just 5%. Halving the MMR meant that customers could take on twice as much debt for the same minimum monthly repayment. Furthermore, card issuers made a fortune in extra interest because balances take far, far longer to repay at 5% a month than 10% a month!

As you'd expect, this bunch of cunning bankers took this strategy even further, reducing MMRs to 3%, 21⁄2%, 21⁄4% and then 2%, which is just about as low as even the most aggressive lender would want to go. Or is it? No, sirree!

Sadly, a new, and terrifying, card trick is on the rise: something that I call the "£5 MMR". Instead of paying a minimum percentage of your balance each month, some credit cards now set the minimum monthly repayment at the monthly interest, plus premiums for swindling payment protection insurance, plus fees, plus £5 (with the absolute minimum repayment being £5 in total).

Just stop to think about this for a moment. With a £5 MMR, all you're doing is repaying your latest monthly charges and then knocking a measly £5 off your debt. In other words, you're only repaying your debt at £60 a year. Thus, a debt of, say, £2,000 will take four hundred months to clear using a £5 MMR, which is thirty-three years and four months!

Even worse, I've built a credit-card simulator which tells me that, at a typical annual interest rate of, say, 15.9% APR, with no rip-off payment protection, you'll repay a total of £6,976 over these four hundred months: your original two grand, plus £4,976 in accrued interest. Ouch!

Without a doubt, the £5 MMR is the most evil and disturbing card trick that I've ever seen in almost two decades in financial services. In fact, it's so grossly unfair to consumers that I sincerely believe the Office of Fair Trading should ban it.

For the record, I found the £5 MMR lurking in the Summary Box of many cards issued by MBNA, but it's sure to catch on elsewhere, so I'd urge you to check your cards today. Incidentally, certain Lloyds TSB cards don't even bother with the £5: the MMR only repays the latest charges and so doesn't reduce your balance by even a penny!

In the meantime, the immediate answer to this problem is never to pay your card's MMR. Instead, set up a standing order or Direct Debit for a fixed monthly amount, say, £40 for every £1,000 that you owe. This will pay off your debt far faster than any MMR ever would!

Finally, why pay sky-high interest rates on your card balance, when you can enjoy interest-free credit for up to a year, or lifetime rates below 6% a year on transferred debts? You'd be crazy not to take advantage of these low- and no-interest deals!

Many thanks to Fool reader Brian B for inspiring this article.

Teens need money lesson

Coming up short on finances
By JEAN CHATZKY

It's important to teach teens about money.
As the mother of two children - neither of whom (thank goodness) have hit their teen years quite yet, I am keeping a list of those things my kids will have to know more about - or at least understand in a different way - than I did at their age.

There's Internet safety. A souped-up college application process. Sex (gulp). And money.

Today, I think I'll stick close to my comfort zone and focus on the last item.

Last week, the Charles Schwab Foundation released its annual survey on Teens and Money and it shows that although kids are acting financially, in many ways, as adults do, they don't have the appropriate knowledge to guide their behavior.

"Kids today are taking on more sophisticated money habits, yet they don't understand the implications," said Carrie Schwab Pomerantz, president of the Schwab Foundation. Six of 10 teens age 13 to 18 know how to write a check, the survey said. However, only four of 10 know how to balance a checkbook. This is a problem.

If your kids aren't tracking what they spend, they'll find their money flows through their fingers far too quickly.

Also, they'll find it's way too easy to withdraw more than they have and get swamped with overdraft charges. You can learn to balance a checkbook in a few hours. It's just simple math.

According to JA Worldwide (formerly known as Junior Achievement), 11% of teens have credit cards in their own name, and 6.2% of those 13 and 14 have their own plastic.

Teach them what interest is - the percentage of your purchases you pay for the privilege of borrowing money from the credit card company - and how quickly it can add up.

Kids also don't understand the fees and penalties that come with not paying their credit card bills on time or going over their spending limit, Pomerantz noted.

So, print out a few online credit card applications as examples. The required Schumer Box displays details such as the interest rates, late fees, penalty fees and grace period.

Warn against paying the minimum balance. For example, a $1,000 balance on a card with an 18% rate will take more than seven years and cost an extra $516 to pay off if you make minimum payments.

Tell your teen he or she will be 25 by then. That should hammer the message home.

Finally, explain how truly useless reward cards marketed to students tend to be. With a spending limit of $500, earning enough points for a plane ticket to use for spring break is tough - if not impossible - to do.

If you haven't started your teen on an allowance, I'd recommend it. Consider it an introduction to a paycheck, said Hollis Page Harman, author of "Money Sense for Kids" and president of kidsfinance.com.

The idea is to give your teen a part of the money you already spend on him or her along with some direction on what it's to be used for.

Harman recommends teaching your teen to save 10% of that allowance so it will seem natural to save the same amount of the first paycheck as well, to save 20% for bigger purchases to come later and live on the other 70%.

Then require your teen to pay for some of his or her recurring expenses, such as meals out or cell phone bills.

Make it clear that Google (and ebay and Yahoo, etc.) come along only once in a blue moon, but investing in the stock market is a good way to make money - and an important skill to have for their future.

Explain the value of diversification - of not putting all their eggs in one basket. But above all, stress consistency.

If you keep investing from your 20s until your 60s, come retirement, you'll be just fine. If you start when you're a teen, you'll be finer than fine.

If they can muster $100 a month - less than $25 a week - and put it into a brokerage account where they earn an 8% return, they'll have $350,000 40 years down the road. That's what most people can expect if they start this habit when they get their first job.

But what if they start 10 years earlier and invest the same $100 a month from age 15 to age 65? That little nest egg is worth $800,000. Their mouths will drop.

Finally, it's important to point out that it's not just what you say to your kids that matter, it's the behavior you model for them on a day-to-day basis.

A quarter of the teens surveyed by Schwab said their parents often lecture them about money, but then don't practice what they preach.

I've always felt that the most important money lesson you can teach your kids has much more to do with good parenting than good financial management.

Let them know that while you might like a BMW, a Honda will have to do. That'll make it easier for them to understand they can't have everything they want when they want it.

Jean Chatzky is the author of the best-selling book "Pay It Down!"

E-mail: personalfinance@nydailynews.com

I hate hidden fees

Financial advertisers are simple beasts: they lead with all the attractive features in the big print, while consigning all the nasty stuff to small print which can only be read with an electron microscope. Hence, it's absolutely vital to plough through the small print looking for nasties, because, as the old saying goes, "the Devil's in the detail"!

Perhaps the greatest fans of hidden fees (and fines) are credit-card issuers. If you don't look beyond the headline promotion, you might miss the following:

* Fees for balance transfers to 0% cards, which can add 2% to the transfer cost;
* Annual fees of between £10 and £50 a year (after years in the wilderness, these are making a comeback); and
* Penalties of between £20 and £25 for exceeding your credit limit, paying late, missing or bouncing a payment.

To find out the real nitty-gritty behind the plastic, be sure to read the Summary Box (also known as the honesty or Schumer box), which lists all financial details and charges.

Sick and tired of paying interest on your plastic? Then transfer your balances to a 0% credit card!

Lack of credit card knowledge, could cost you

How much do you know about your credit cards? Apparently not very much, according to a new survey.

A lack of credit card knowledge could affect you in more ways than you think.

Your credit is important. It affects your ability to buy just about anything, from a new pair of shoes to a new home.

But, do you really understand the fine print in your credit card agreements?

"Every credit card offer has a Schumer Box, which lists key information about that offer, such as the APR, or the annual percentage rate, as well as what happens if say you're late in making a payment on that card," explains Personal Finance Expert Lynnette Khalfani.

However, according to a new survey, 44-percent of respondents' say they don't know the APR charged on their cards, while 20-percent don't know what their credit limit is.

The findings suggest that some problems could begin with credit offers received in the mail.

"Credit card offers with really tiny fine print or hard-to-find disclosures can be confusing for consumers," says Khalfani. "The Schumer Box is a valuable consumer resource, but I still think that a lot more can be done within the industry to make credit card disclosures a lot easier for consumers to understand."

For example, your card may have a universal default clause, which means if you're late paying on one card, your rate on another card could go up, sometimes significantly.

"Don't accept a credit card based solely on the interest rate that you're being offered. You really need to shop around and compare overall terms," says Khalfani.

If you get a credit card offer in the mail, you don't want, be sure to shred it as well.

National Survey Reveals Consumers Lack Basic Facts

Congress has declared April 2006 "Financial Literacy Month." An annual designation, the Congressional resolution recognizes the need to raise public awareness about the importance of financial education and the serious consequences that can result from a lack of understanding about personal finances. Financial Literacy Month offers Americans a chance to focus on the need for financial education and take a close look at their own financial well-being.

A newly released survey about credit card knowledge shows that Americans have a lot of improving to do. Findings reveal that most Americans don’t know important details about the cards they carry. Forty-four percent of respondents say they don’t know the APR charged on their cards and 20-percent don’t know what their credit limit is. The findings suggest problems often begin with credit offers received in the mail. Every credit card offer contains a Schumer Box, which contains key information about that offer including the interest rate on the card and applicable membership or penalty fees. Although the Schumer Box is a helpful consumer resource, the fine print is often small and can include language that is confusing for consumers.

Financial expert and best-selling author Lynnette Khalfani discusses the findings of the survey, tips consumers can use to get credit smart, and steps companies like Capital One are taking to make credit card offers more transparent and easier to understand.

Store cards criticised for lack of transparency

Stores around Britain have been accused of encouraging consumers to take out cards without explaining the facts about the high rates of interest they charge. The Office of Fair Trading, as the competition watchdog, said it had "serious questions" about store cards, and referred the matter to the Competition Commission.

Research that found just 23 per cent of shoppers were offered the chance take an application form away with them. Of the remainder, three quarters had a request to do so refused. Additionally, information on the interest rate was not available in about a third of cases. "There is a lack of transparency at all stages of the process of providing consumer credit through store cards - before signing, at point of sale, and post-contract," the regulator said.

The OFT also called for an 'honesty box' to go on application forms and bills which explains the cost of only making the minimum payment to consumers. The OFT was asked to investigate the lucrative market, following an inquiry into store cards by the House of Commons' Treasury Select Committee, which alleged that many schemes charged exorbitant interest rates and concealed this information from consumers. The Treasury Committee accused some stores of "highway robbery" and "fleecing" card holders. £4.8 billion is spent on store cards each year. There are 22.85 million active store cards in the UK and 18.6 million accounts.

In response to the findings, Phil Evans, principal policy adviser at the Consumers' Association, said: "The investigation has clearly shown that the store card market doesn't function in the best interests of consumers. Store card rates have stuck at an average of around 28 per cent for the last few years. They have not tracked the general decline of credit card and loan rates and seem to be immune from competition within the wider market for credit. The lack of discipline imposed by the credit market on store cards is concern enough to trigger an inquiry."

OFT cracks down on card charges

Charges for failing to make the minimum payment on a credit card bill on time are too high, the Office of Fair Trading (OFT) has said. A default charge, as it is called, of more than £12 will be considered unfair, the OFT said. The OFT added it wanted firms to recalculate their charges and only under "exceptional" circumstances would a charge in excess of £12 be allowed. Consumers pay more than £300m a year in "unlawful" charges, the OFT added. "Credit card default charges have generally been set at a significantly higher level than is legally fair, " the OFT statement said.

The OFT added that if a credit card firm levied a default charge of more than £12 then it would consider challenging the fee in the courts. An OFT spokeswoman told BBC News that she hoped that firms would put their own house in order. "This statement is an attempt to move the market quickly, so consumers can benefit," the spokeswoman said. "Default charges should only reflect the administrative costs of dealing with the default."

The principle that default charges should only reflect company costs is set to have wider implications for many UK banks and building societies. Ultimately, the OFT said, this principle would apply to default charges on overdrafts, store cards and mortgage products.

A spokeswoman for Barclaycard, the UK's biggest credit card provider, with 11.2 million cardholders, said "it was seeking further clarification from the OFT and will consider the implications fully before responding any further."

The credit card industry has until 31 May to respond to the OFT statement. The OFT began its investigation into credit card charges in 2004.