No respite in interest rates on the cards
Unlike interest rates on home loans, business loans, or deposit accounts, credit card rates seem to have a life of their own that has little to do with official rates.
Since late 2011, discounted mortgage rates (which are what most people pay on their home loan) have fallen 1.7 percentage points to about 5.35 per cent. This is indeed less than the 2 percentage-point fall in the cash rate - the Reserve Bank's main benchmark rate that it sets at monthly board meetings. But it's still a substantial fall.
Credit card interest rates, in contrast, seem almost completely divorced from Reserve Bank settings.
According to the Reserve, the rates on standard credit cards, which often include rewards programs, have fallen by just 0.15 percentage points to a still eye-popping 19.55 per cent.
Even the average rate for a "low-rate" card has been largely disconnected from the official rate. These cards are a "no-frills" option without perks such as reward schemes, and their rates do at least come down sometimes. However, they still appear to pass on a bigger share of the rises to their customers than the cuts.
Take this example. When official rates rose from their 2009 low of 3 per cent to 4.75 per cent in late 2010, rates on "low-cost" cards rose by the same amount.
But while the RBA has cut official rates by 2 percentage points since late 2011, the rates on these cards have drifted down by just 0.3 percentage points over the same period.
It looks suspiciously like the banks are eagerly passing on rises but holding back on cuts. But banks insist that's not the case.
Lenders argue that changes in the cash rate have little impact on the cost of offering credit cards.
Banks also point out that credit card rates will always be relatively high because it is unsecured debt. If a home-loan customer defaults, the bank has security over the house. There are no such assurances with credit card debts.
These points are all very well, but should be seen in context. The fact is, surveys suggest many people have a limited understanding of how credit cards work, and most don't know the interest rate on their card.
When seen in this light, it seems pretty clear the banks are also exploiting the poor public awareness of credit card debt to charge whatever they can get away with.
Frequently Asked Questions about this Article…
Credit card interest rates are typically higher because credit cards are unsecured debt — there’s no asset (like a house) for lenders to repossess if a borrower defaults. The article notes that this unsecured nature helps explain why standard card rates remain high even when mortgage rates or the Reserve Bank (RBA) cash rate move.
According to the article, since late 2011 discounted mortgage rates have fallen about 1.7 percentage points to roughly 5.35%, and the RBA cash rate has dropped about 2 percentage points. By contrast, rates on standard credit cards have only fallen about 0.15 percentage points to around 19.55%.
The article suggests banks tend to pass on rises more readily than cuts. For example, when the official rate rose from 3% in 2009 to 4.75% in late 2010, low-cost card rates rose by a similar amount. But after the RBA cut the cash rate by 2 percentage points since late 2011, low-rate card rates only drifted down about 0.3 percentage points.
The article states Australians owe about $36 billion in credit card debt, highlighting the scale of exposure to high card interest rates.
Standard credit cards often include perks like rewards programs and have higher average interest rates (around 19.55% in the article). Low-rate or ‘no-frills’ cards typically lack rewards but advertise lower interest; however, the article notes even these low-rate cards have been slow to pass on official rate cuts and can still rise quickly when official rates increase.
Banks say changes in the RBA cash rate have little impact on the actual cost of offering credit cards. They also point to the unsecured nature of card debt — higher default risk — as a justification for keeping card rates relatively high irrespective of official rate moves.
The article reports that surveys suggest many people have a limited understanding of how credit cards work and that most cardholders don’t even know the interest rate on their own card. That lack of awareness is highlighted as a factor allowing banks to maintain high card rates.
The article finds it ‘suspicious’ that banks appear to pass on rate rises more quickly than cuts, and it suggests banks may be taking advantage of low public awareness. Banks deny deliberately withholding cuts, arguing other cost factors explain card pricing, but the observed data in the article shows cuts have been passed on far less than rises.
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