According to recent findings, three out of five Aussie customers are not receiving any financial benefits from having a credit card.

It’s long been suspected that for many people, the humble credit card is a pretty poor financial product, which can end up costing far more than it returns in benefits.

Now we have a bit more proof that these warnings from consumer advocates were spot on.

As banks face pressure to live up to claims they “put customers first”, the Reserve Bank released research finding almost two out of three Australian cardholders receive no “net monetary benefit” from having a credit card.

When you think about it, that’s a surprisingly high proportion of customers who are no better off financially from paying on plastic.

And that makes you wonder: why do so many of us decide to pay on credit if it’s not really worth our while, financially?

Is it convenience; the lure of rewards points; are we overly optimistic about paying off the full balance in time; or is it simply too difficult or tedious to switch to a rival bank with a better offering?

The research discussion paper, by Mary-Alice Doyle, sets out to investigate the role of these “behavioural biases” in our credit card decision-making.

Common mistakes you can avoid

Australians have about $52 billion in credit card debt, of which about $32 billion is racking up interest.

For some, a credit card makes good sense. If you choose the right type of card and pay it off every month without incurring interest, you will get access to an interest-free period and may well rack up rewards points that can be exchanged for perks such as vouchers or flights.

But in recent years, policymakers and regulators have been increasingly concerned about a significant group of people who end up worse off from having a credit card, often because of the high rates of interest approaching 20%.

The RBA paper defines being financially better off from having a card as being more than $50 ahead each year, after taking into account the gains from a rewards points and interest-free periods, versus the cost of fees and interest payments.

It finds that only about 40%, or two out of five card holders are better off from having a card, and these are most likely to be wealthier people with higher incomes. The typical value of this benefit is $105 a year. Meanwhile 30%, or almost one in three customers, are financially worse off from having a credit card, the report says. The remaining 30% of cardholders roughly break even.

That implies 60%, or three out of five customers are not receiving any financial benefits from having a credit card.

Now, that might still make sense, if the customers’ goal was to smooth their spending with a line of credit. But the study doesn’t support this either, because it finds most customers probably don’t choose the right card to suit their spending and borrowing patterns.

For example, it estimates that people who use cards with the intention of borrowing money could save themselves about $250 a year by choosing a more appropriate card, such as one with a lower interest rate.

It says almost two out of three of the customers who are losing money on their credit card could avoid that loss altogether by switching to a different type of card.

Why people make mistakes

That clearly doesn’t look like “rational” behaviour. Instead, the paper puts forward a couple of potential explanations.

One is that we are not great at predicting our future spending and borrowing patterns, because we are too optimistic. For example, the study cites figures showing many underestimate the chances that we will actually pay interest when taking out a card.

Another possible reason for irrational credit card use is that a “subset” of cardholders over-estimate the financial value of the benefits they will get out of their card.

“These cardholders are more likely to be motivated by rewards points, and less likely to have paid interest in the past year,” the paper says.

And as is the case with so many financial products, credit card customers are also unlikely to switch from a dud product into a better one.

All up, the paper leaves you thinking our decision-making in the credit card market is far from rational – and many of us could save money by thinking carefully and switching to something more suitable.

This article was originally published by The Sydney Morning Herald on 16 October 2018. It represents the views of the author only and does not necessarily reflect the views of AMP

Many parents approach the topic of money differently, but could your way of doing things influence your kids’ success?

The majority of Aussie mums and dads recognise that they’re accountable when it comes to shaping their children’s perspective around money matters.

A recent report published by the Financial Planning Association of Australia (FPA), revealed parents listed themselves (95%), followed by grandparents (63%) and teachers or coaches (59%) as the top three biggest influencers when it came to instilling money values in their kids.ⁱ

What money conversations are parents having?

As part of the research, parents said they mainly concentrated on day-to-day issues when talking money with their children, admitting that more contemporary issues, such as making transactions digitally, were sometimes overlooked.ⁱ

What parents said they discussed:ⁱ

• 52% – how to spend and save
• 43% – how to earn money
• 32% – how household budgeting works
• 24% – how much people earn
• 19% – making online purchases
• 13% – in-game app purchases
• 5% – buy now, pay later services, such as Afterpay.

What approach do you take with your kids?

The research undertaken indicated that there were four prominent personalities parents assumed when discussing money with their children, with some parents initiating conversations more frequently, while others were sometimes a little more hesitant.ⁱ

The four distinct personalities that came out of the research included:ⁱ

The engaging parent

Common traits:

• You have the most conversations around money with your kids and feel comfortable doing so
• You tend to have a higher household income
• You’re more likely to use money to encourage good behaviour in your children
• Due to high engagement, your kids are often more financially prepared than other kids
• Your kids have a greater interest in learning about all types of money matters.

The side-stepping parent

Common traits:

• You are less comfortable talking to your kids about money so have fewer conversations
• You may have less money coming in as a household
• You’re less transparent about what you earn and money matters in general
• You tend to provide the least amount of pocket money and as a result your children may be less interested in learning about money and how to make transactions.

The relaxed parent

Common traits:

• You’re comfortable talking to your kids about money but don’t do so too often
• You take a relaxed approach to money matters and are transparent about money issues
• There is little financial stress in your home
• Your relaxed nature may lead to your children missing out on opportunities to learn about money, which means your kids may need to explore money matters on their own.

The do-it-anyway parent

Common traits:

• You’re not always comfortable talking about money but still have frequent conversations
• You’re mainly concerned your child will worry about money if you talk about it
• Despite your discomfort, your perseverance generally pays off
• Your teenage children are more likely to have a job than the average child.

What approach is best according to the research?

Engaging parents were more likely to report that their children were more curious, confident, and financially literate than they were at their age.ⁱ

According to parents who fell into this category, their children were the most equipped to understand and transact in today’s digital world and their teenagers were the most likely to have a job and make online purchases for themselves or their family.ⁱ

In addition, the research found children with a paid job outside of the family home were more financially prepared to engage with money.ⁱ

They were also used to transacting digitally and showed greater interest in learning about paying taxes and superannuation than those who didn’t have a job.ⁱ

If you need help to manage your money more confidently so you can pass on good habits to your kids, give us a call.

i Financial Planning Association of Australia: Share the Dream – Research into raising the invisible-money generation 2018 page 6,

© AMP Life Limited.
First published February 2019

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital

Key points

– Australian elections tend to result in a period of uncertainty which have seen weak gains on average for shares followed by a bounce once it’s out of the way.

– With Labor promising higher taxes, larger government and more intervention in the economy the May election presents a starker choice than has been the case since the 1970s & so suggests greater uncertainty than usual.

– Labor’s higher tax and regulation agenda may be a negative for Australian assets, but this could be partly offset in the short term by more targeted fiscal stimulus.

– To return to decent wage gains requires a productivity enhancing reform agenda & much lower unemployment. This election is unlikely to deliver much on the former.

The Federal Election

Some might be forgiven for thinking the wheels have fallen off Australian politics over the past decade with the same number of PM changes as Italy, a fractured Senate and “minority government” at times making sensible visionary long-term policy making hard. With the May 18 Federal Election offering a starker than normal choice political uncertainty may see another leg up. Polls give Labor a clear lead, albeit it’s narrowed a bit.

Elections, the economy & markets in the short term

There is anecdotal evidence that uncertainty around elections causes households and businesses to put some spending decisions on hold – the longer the campaign the greater the risk. Fortunately, this time around it’s a relatively short campaign at five weeks. However, hard evidence regarding the impact of elections on economic indicators is mixed and there is no clear evidence that election uncertainty effects economic growth in election years as a whole. In fact, since 1980 economic growth through election years averaged 3.6% which is greater than average growth of 3.1% over the period as a whole.

In terms of the share market, there is some evidence of it tracking sideways in the run up to elections, which may be because investors don’t like the uncertainty associated with the prospect of a change in policies. The next chart shows Australian share prices from one year prior to six months after federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the global share crash in late 1987 and the start of the global financial crisis (GFC) in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 and 2013 elections, which saw a change of government to the Coalition. The chart suggests some evidence of a period of flatlining in the run up to elections, possibly reflecting investor uncertainty, followed by a relief rally.

Australian equity market around election days

Weeks before and after the election

Source: Thomson Reuters, AMP Capital However, the elections resulting in a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after the 2007 Labor win, with global developments playing a role in both. After the 1996 and 2013 Coalition victories shares were flat to down. So based on historical experience it’s not obvious that a victory by any one party is best for shares in the immediate aftermath, and historically the impact of swings in global shares arguably played a bigger role than the outcomes of federal elections.

The next table shows that 9 out of the 13 elections since 1983 saw shares up 3 months later with an average gain of 4.8%.

Australian shares before and after elections

Election	Winner	Aust shares, % chg 8 weeks up to election	Aust shares. % chg 3 mths after election
Mar 1983	ALP	-0.6	19.8
Dec 1984	ALP	0.0	5.4
Jul 1987	ALP	3.7	15.9
Mar 1990	ALP	-7.0	-3.5
Mar 1993	ALP	9.0	3.2
Mar 1996	Coalition	2.3	-2.0
Oct 1998	Coalition	-2.6	11.1
Nov 2001	Coalition	5.9	5.4
Oct 2004	Coalition	5.9	9.9
Nov 2007	ALP	-2.9	-11.7
Aug 2010	ALP	0.5	5.7
Sep 2013	Coalition	4.6	-1.0
Jul 2016	Coalition	-0.6	4.5
Average	1.4	4.8

Based on All Ords index. Source: Bloomberg, AMP Capital The next chart shows the same analysis for the Australian dollar. In the six months prior to Federal elections there is some evidence the $A experiences a period of softness and choppiness, which is consistent with policy uncertainty, but the magnitude of change is small. On average, the $A has drifted sideways to down slightly after elections.

Australian dollar around election days

Weeks before and after the election

Source: Thomson Reuters, AMP Capital

Political parties and shares

Over the post-war period shares have returned 12.7% pa under Coalition governments and 10.7% pa under Labor governments. It may be argued that the Labor governments led by Whitlam in the 1970s and Rudd and Gillard more recently had the misfortune of severe global bear markets and, if these periods are excluded, the Labor average obviously rises to 15.8% pa, although that may be taking things a bit too far. But certainly, the Hawke/Keating government defied conventional perceptions that conservative governments are always better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.3% pa, the strongest pace for any post-war Australian government.

Once in government, political parties are usually forced to adopt sensible macro-economic policies if they wish to ensure rising living standards and arguably there has been broad consensus on both sides of politics in recent decades regarding key macro-economic fundamentals – eg, low inflation and free markets.

Policy differences starker than since the 1970s

However, after narrowing in the 80s and 90s with the rationalist reform oriented agenda kicked off by Hawke and Keating, in recent years the policy differences between the Coalition and Labor have been intensifying again to the point that they are now arguably starker than they have been since the 1970s (when there used to be more of a focus around “class warfare”). In part this is consistent with rising interest in populist policies globally which in turn reflects angst over low wages growth, widening inequality, globalisation and automation. Each side of politics is now offering very different visions on the role and size of government. And so the policy uncertainty around this election is greater than usual.

The Coalition is focussed on containing government spending and encouraging economic growth via infrastructure spending, significant personal tax cuts (to return bracket creep and cap taxation revenue at its long term high of around 24% of GDP) and mild economic reforms.

By contrast Labor is focussed on spending more on health and education and in the process allowing the size of the public sector to increase. This is proposed to be funded by “tax increases” including:

• cancelling the Coalition’s middle and upper income personal tax cuts scheduled for next decade and reimposing the 2% Deficit Repair Levy on incomes above $180,000;
• restricting negative gearing to new residential property (and no other assets) and halving the capital gains tax discount from January 1 2020;
• stopping cash refunds for excess franking credits; and
• a 30% tax rate on distributions from discretionary trusts;

It’s not proposing to spend all the extra revenue this will raise with some earmarked for higher budget surpluses (ie paying down public debt). It’s also promising a sharp lift in the minimum wage towards being a “living wage”, some labour market re-regulation, far more aggressive climate policy (with a 45% reduction in emissions on 2005 levels by 2030, which is almost double the Coalition’s policy) and in relation to superannuation key changes are likely to include a resumption of the increase in the Super Guarantee, lower non-concessional contributions and a lower income threshold for the application of the 30% tax rate on super contributions. Intervention in the economy is likely to be higher under a Labor government.

Perceptions that a more left leaning Labor government will mean bigger government, more regulation and higher taxes and hence act as a drag on productivity and be less business friendly may contribute to more nervousness in shares and the $A than usual around this election. More specifically there are a number of risks:

• There is a danger that relying on tax hikes on the “top end of town” will dampen incentive in that Australia’s top marginal tax rate of 47% is already high – particularly compared to our neighbours: 33% in NZ; 20% in Singapore; and 15% in HK. Australia’s income tax system is already highly progressive: 1% of taxpayers pay 17% of the total personal income tax take (with an average tax rate of 42%) & the top 10% pay 45% of tax compared to the bottom 50% who pay around 12% (with an average tax rate around 11%).
• The proposed changes to franking credits even though they only impact around 8% of taxpayers are potentially a negative for stocks with high-franked dividends.
• The proposed changes to capital gains tax and negative gearing have been estimated to cause a 5 to 12% decline in home prices & a boost to rents of 7 to 12%. This is risky as the property market is already weak. This could further impact construction/property stocks, banks & retail shares.
• Higher minimum wages and some labour market re-regulation risk higher unemployment, a less flexible labour market and are a negative for hospitality and retail stocks.
• The focus on economic reform needed to boost productivity looks to have fallen by the wayside in the face of populism – eg, why aren’t we considering injecting more competition into the health sector along with spending more on it?

That said there are some offsets in relation to ALP policies that investors need to allow for:

• Some ALP policies may not pass the Senate, including those around negative gearing and repealing the middle & upper income tax cuts that have already passed into law.
• Labor is planning bigger budget surpluses which is positive.
• Labor policies encouraging “build to rent/affordable housing” are positive, but it’s unclear how much impact they will have.
• Labor policies focussed on greater spending and tax cuts more targeted to lower saving low income earners may provide more of a short-term boost to economic growth.
• Labor has a track record of taking sensible advice & responding quickly to help the economy in a crisis (think 1983 and in the GFC). In the short term, this could include a First Home Buyer grant to mute the property downturn.

Concluding comment

The now wider left right divide in Australian politics suggests greater uncertainty going into this election potentially affecting all asset Australian classes. But the bigger concern is the dwindling prospects for productivity enhancing reform, which could be an ongoing dampener on growth in living standards.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.