No respite in interest rates on the cards
If you think banks gouge their home-loan customers, spare a thought for the people paying credit card interest. When the Reserve Bank changes interest rates, the media and politicians obsess over what it means for the cost of a mortgage. The interest rates levied on the nation's $36 billion in credit card debt, however, often fly under the radar.
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.