Effie Za­hos

But some in­no­va­tive prod­ucts link the pur­chase rate to the mort­gage

Money Magazine Australia - - CON­TENTS -

De­spite 12 Re­serve Bank cuts to the of­fi­cial cash rate since 2011, the av­er­age per­sonal credit card pur­chase rate hasn’t budged from 19%. Look­ing at his­tor­i­cal pur­chase rates on the big four’s suite of credit cards from Fe­bru­ary 2014, I was stunned to learn that when three of them did move rates it was up rather than down, as the Re­serve Bank had cut the cash rate four times by that time, from 2.5% to 1.5%.

As Peter Arnold, RateCity’s data and in­sights di­rec­tor, says: “Con­sumers are right to ex­pect that credit card rates will move up and down in line with the cash rate and, up un­til 2011, that was the case.”

This is no longer the case. To­day there’s a 17.5% gap be­tween the av­er­age credit card pur­chase rate and the cash rate. In 2007, that gap was around 8%.

That said, I am talk­ing about the av­er­age pur­chase rate for all cards. There are plenty of in­no­va­tive cards, some with in­ter­est rates linked to home loan rates, which makes perfect sense given that most home own­ers take out a pack­age that gen­er­ally comes with a card.

Banks could ar­gue that credit cards are an un­se­cured debt so the in­ter­est rate needs to re­flect the risk. But so are un­se­cured per­sonal loans, which are nowhere near 19%. They could ar­gue that re­wards cards don’t come cheap. But what are in­ter­change fees and an­nual fees for?

I should point out a few things here. The de­fault rate, where re­pay­ment is more than 90 days late on credit cards, was just 1.5% in early 2015. How­ever, the over­all loss rate is prob­a­bly higher than that be­cause some is­suers write off credit card debts be­fore they get listed as “non-per­form­ing loans”.

As for why rates are so high, we don’t know enough about banks’ fund­ing sources. They al­ways ar­gue, as high­lighted in a Se­nate com­mit­tee re­port late last year: “We can­not pass rate cuts on be­cause our sources of fund­ing are dif­fer­ent – it is not just the cash rate; it is our ex­ter­nal sources.”

Quoted in the Se­nate re­port, Swin­burne Univer­sity of Tech­nol­ogy eco­nomics pro­fes­sor Ab­bas Val­ad­khani noted that be­tween 1990 and 2012 the banks had im­me­di­ately passed on 112% of RBA cash rate in­creases (the full value plus 12%) but only 53.7% of cuts – and cuts were de­layed by an av­er­age 2½ months. He called this the “rock­ets-and-feath­ers” ef­fect: credit card in­ter­est rates “shoot up like a rocket” but “float down like a feather”.

Canstar an­a­lyst James Slack says that while the credit card mar­ket is very com­pet­i­tive, banks seem to try to dif­fer­en­ti­ate them­selves with pur­chase rates, per­haps be­cause we don’t pay at­ten­tion to the in­ter­est rate on our card.

The good news is that we are pay­ing off our card debt at a record rate. Bal­ances ac­cru­ing in­ter­est have been fall­ing since reach­ing a peak of $37.1 bil­lion, or $2471 a card, in April 2012, re­ports finder.com.au.

Where does this leave credit card is­suers? Slack says they’ll need to adapt to de­clin­ing in­ter­change rev­enue (the RBA has put a cap on this) as well as in­ter­est rev­enue if card­hold­ers pay their out­stand­ing bal­ances in full each month.

“Banks may find it hard to re­tain cus­tomers who have nearly 200 credit cards in the mar­ket to choose from,” he says. “They will have to in­no­vate to re­tain and at­tract new cus­tomers.”

And some are. The P&N Bank home loan pack­age, for ex­am­ple, in­cludes a Visa Plat­inum card with a pur­chase rate (4.15%pa) linked to P&N’s vari­able mort­gage rate (4.15%pa). Ser­vice One Al­liance bank of­fers a sim­i­lar prod­uct, link­ing its Visa card rate to its stan­dard vari­able rate for home loan cus­tomers.

Other picks from Canstar in­clude Ci­tibank’s “fixed pay­ment op­tion” on credit card pur­chases worth more than $1000. The pur­chases are con­verted to a loan with fixed monthly re­pay­ments at 12.99%pa. The loan re­duces the avail­able bal­ance on your credit card but doesn’t af­fect the in­ter­est­free days for other pur­chases on the card.

Amer­i­can Ex­press of­fers card­hold­ers in­ter­est-free in­stal­ment pay­ments on their cards. Pur­chases cost­ing as lit­tle as $300 can be paid for in in­stal­ments for three, six or 12 months at 0% in­ter­est. An up­front fee does ap­ply – 2% (three months), 3% (six months) and 4% (12 months). A par­tic­u­lar pur­chase can’t be nom­i­nated; rather debts on pur­chases above a cer­tain amount are au­to­mat­i­cally con­verted for in­stal­ment pay­ments. The ar­range­ment can be turned on or off by the card­holder at any time.

And fi­nally there are cards that of­fer longer in­ter­est-free pe­ri­ods. GEM Visa, for ex­am­ple, has no in­ter­est for six months on pur­chases cost­ing $250 or more at par­tic­i­pat­ing stores. The catch? If you don’t pay it off in time a very high pur­chase rate of 24.99% ap­plies.

Fi­nance ex­pert and au­thor of The Great $20 Ad­ven­ture, Money’s edi­tor Effie Za­hos, ap­pears reg­u­larly on TV and ra­dio. She started her ca­reer in bank­ing.

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