Credit card debts being paid off faster
It comes as figures show banks have passed on only a fraction of recent Reserve Bank interest rate cuts to credit card customers, with personal and car loans mirroring a similar move.
In a sign households remain debt-shy, the average credit card balance slumped 2.4 per cent to $3256.70 in the year to March, Reserve Bank figures showed on Monday.
The average balance that is accruing interest fell even more sharply, by a record 5.7 per cent to $2294.30, according to CommSec economists, the biggest annual fall since such figures began in 2002.
The rush to pay down credit card debt coincides with banks reducing card interest rates by an average of only 0.12 percentage points since late 2011, compared with a 2 percentage point cut in official rates set by the Reserve Bank.
Banks have also failed to pass on official rate cuts to people with personal loans.
Figures from Canstar show personal loan interest rates have fallen just 0.78 percentage points since October 2011 to 14.68 per cent, less than half the reduction in official rates over this period.
Car loans rates offered by the big banks have fallen by even less, dropping 0.58 percentage points, to 14.73 per cent.
Canstar analyst Joshua Zenas said interest rates on personal loans came under less public scrutiny than mortgage rates, which made the market less competitive. Also, he said, borrowers did not shop around for personal loans as thoroughly as for home loans.
"Mostly, they are comfortable staying with the bank they are with."
The profits from personal loans are worth millions to banks. About $1 billion in new car loans is issued each month, and personal finance commitments are worth more than $7 billion a month.
Frequently Asked Questions about this Article…
Consumers are becoming more debt‑shy and rushing to reduce credit card balances after recent Reserve Bank rate cuts, while banks have passed on only a small fraction of those official cuts to card customers. That combination has encouraged households to pay down balances rather than carry interest.
Reserve Bank figures show the average credit card balance fell 2.4% to $3,256.70 in the year to March. The average balance that is actually accruing interest fell even more sharply — a record 5.7% to $2,294.30, according to CommSec economists.
A falling balance that accrues interest means fewer cardholders are carrying debt month to month, which lowers interest costs for households. The record drop suggests consumers are prioritising paying down cards rather than paying ongoing card interest.
No. Since late 2011 banks have reduced credit card interest rates by only about 0.12 percentage points on average, while the Reserve Bank’s official rate was cut by roughly 2 percentage points over the same period — meaning cardholders have received only a small share of the relief.
Canstar data show personal loan rates have fallen about 0.78 percentage points since October 2011 to 14.68%, and big‑bank car loan rates have dropped about 0.58 percentage points to 14.73% — both well below the total reduction in official Reserve Bank rates.
Canstar analyst Joshua Zenas says personal loans face less public scrutiny than mortgages, making that market less competitive. Borrowers also tend not to shop around as thoroughly for personal loans and often stay with their existing bank, allowing lenders to keep margins higher.
Personal and car finance remain lucrative for lenders: the article notes about $1 billion in new car loans is issued each month and more than $7 billion in personal finance commitments monthly. That steady lending activity and slower pass‑through of rate cuts can help preserve bank profits, something investors tracking bank margins may want to note.
Keep an eye on Reserve Bank rate moves and whether banks pass those cuts through to card, personal and car loan customers; trends in average credit card balances and balances accruing interest; and competition in the personal loan market, since these factors affect consumer finances and banks’ lending margins.
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