FOOL'S EYE VIEW
When In Doubt - Ask!

By David Kuo (TMFDragon)
November 22, 2001

Carburton Street, London -- There is no shame in shouting out, "I don't understand" when you have doubts about financial matters. Don't just whisper it quietly to yourself and then suffer in silence. The more people that come clean and admit they don't understand financial jargon, which is typically designed to intimidate and confuse, the better it will be for all of us in the long run.

It is almost undeniable that personal finance and consumer credit matters have become so complex that you virtually need a PhD in economics to understand simple financial literature. In May, Chief UK Fool David Berger called on the financial services industry to speak plain, jargon-free English. He said consumers would be better placed to make financial decisions if the facts were presented to them in a simple and understandable way.

Our findings here at the Fool could go some way to explain a recent report from the National Association of Citizens Advice Bureaux (NACAB), which drew some important deductions on the lack of financial literacy amongst British consumers. NACAB concluded that British consumers were paying a high price for being ill-informed and unconfident when it came to making crucial decisions about their personal finances. The survey also estimated that, as a result of the poor understanding of financial matters, over £11.5b was being squandered on unnecessary credit, inappropriate debt consolidation and unclaimed means-tested benefits.

Interest rates and rate-related scams figured high on the list of common traps that borrowers fall into. This is not altogether surprising, since credit providers will now be keener than ever to capitalise on the ignorance of consumers in times of low interest rates. When interest rates were high, credit providers could rely on the revenues earned from loans, in the form of interest payments, for a significant portion of their revenues. But in these times of low interest rates, lenders will be looking at other ways to boost their revenues. These might include payment protection plans, extended warranties and those exorbitant arrangement fees to bolster turnover.

Notwithstanding the low cost of borrowing, NACAB found that some store cards were still charging significantly higher interest rates on credit balances than, say, prevailing bank lending rates. They claimed that some storecards were charging rates that could be in excess of 30% per year -- some three times higher than a personal loan from a high street bank! It should be remembered that credit cards, charge cards and store cards are some of the most expensive forms of borrowing. That said, if they are used correctly, this form of short-term credit can be a boon to a consumer's cash flow. If you're really smart, you can squeeze up to 56 days of interest-free credit before you need to settle your credit card bill. And during that time, you could even be earning interest on your money in an interest paying bank account.

Credit agreements can be another minefield for consumers. In times like the present, when consumer demand is low and supply plentiful, there are bound to be many attractive deals around to tempt consumers back into the shops. Low prices can help stimulate buying interest, but suppliers will undoubtedly be keen to maintain their profit margins. Competition for the pound in your pocket will ensure that they keep prices as low as possible but they will almost certainly try and catch you out on the credit or hire purchase agreement. Don't be taken in by apparent low interest rates and seemingly affordable monthly payments. Ask the sales representative to work out the total payment over the lifetime of the credit contract, and then compare this figure to the amount you'd pay through an ordinary purchase.

It's also a good idea to spend a few minutes taking a closer look at invoices. Check if early settlement discounts are available. Many utility companies now offer generous discounts for early settlement of bills. So, simply by paying your invoice a couple of weeks ahead of time, say two weeks before the due date, it is possible to get almost 3.5% taken off the bill. Compared against bank deposits rates, which are only paying 5% interest a year, the early discounts are certainly worth taking -- that is if you have the cash available.

There is a lot of truth in the saying that "If you look after the pennies, the pounds will look after themselves". And the pennies can soon mount up if you are prepared to do your homework! Quite often, the time spent doing basic research can pay healthy dividends over the long run. Always seek advice if you are ever in doubt and remember our discussion boards are freely available for those who have questions on financial matters. You'll be surprised at the wealth of knowledge that exits within our Foolish community and what's more -- it's all free!