Have a guess how many credit card issuers cut their interest rates following the reduction in the Reserve Bank cash rate last month. The answer is two – Auswide Bank and P&N Bank.
We should all take a hard look at the credit card we use. Lots of use are making poor choices and lots of use are being ripped off.
Banks and other credit card issuers have long worked on the assumption that consumers get credit cards for convenience first and reward points second, and they are insensitive to the interest rate charged on revolving balances. Consumers tell themselves they will pay their balance in full each month and not incur any interest charges.
Many do behave in that way but a lot don’t. And a surprisingly large number who have a revolving balancing incurring interest charges don’t move to a low-rate card. It’s one of those behavioural finance things.
In a report on the credit card market last year, Credit Card Lending in Australia, ASIC said consumers often had trouble selecting a credit card that suited their actual behaviour and risked falling into a debt trap as a result.
The report raised concerns about the distribution and use of cards, such as balance transfer deals, heavy promotion of rewards cards with high fees and rates, lax credit assessments and a failure to encourage customers to pay off their card accounts in a timely way.
Looking at the impact of balance transfers, ASIC found that 53.1 per cent who used a balance transfer offer reduced their total debt by 10 per cent or more, while almost 8 per cent used the balance transfer to pay off their debt in full.
However, 15.3 per cent maintained relatively stable debt levels and 31.6 per cent increased their total debt by more than 10 per cent, with 15.7 per cent increasing their debt by 50 per cent or more.
“The debt trap risk inherent in balance transfers exists and affects a substantial proportion of consumers,” the report says.
Another concern is the marketing of rewards programs. ASIC says many credit providers promote cards with higher interest rates that have additional benefits, such as reward programs and longer interest-free periods.
“Consumer behavioural biases can mean that consumers select a card based on these promoted benefits, rather than on how they are likely to use the card in practice.”
The banks would argue that they charge high rates because the arrears and default rates on credit cards are high. That is not a very convincing argument when the cash rate is 1.25 per cent and card rates can be as high as 21.9 per cent.
There is evidence that consumers are using less personal credit and the revolving balances on credit cards are lower than in the past. The growing popularity of Afterpay, Zip and other buy now pay later schemes is a factor in this trend.
Still, there is currently around $29 billion of balances accruing interest on personal credit cards. That is $2022 for each of the 14.6 million credit card accounts we hold and a big chunk of that is incurring interest at 20 per cent or more.
There’s a resolution for the new financial year right there. Review your credit card account.