Why aren’t our credit card rates dropping?

The OCR is at record lows. Your credit card? Not so much.

Home loan interest rates have fallen to levels that would have been unimaginable five years ago. Unfortunately for savers, they’ve taken term deposit rates with them.

But what has proved noticeably sticky through all the rate movements is the rate that you pay on your credit card.

While the official cash rate has fallen from 3.5 per cent in 2015 to 0.25 per cent today, and home loan rates from higher than 5 per cent to less than

2.7 per cent, credit card interest rates have stayed largely constant.

There’s more variety in the market now than there once was – you can get low-interest, low-fee, no-frills cards that were not previously available.

But the rates still don’t move much once they’re set. Low-interest credit card rates range from 9.95 per cent a year, with a $30 fee, at Kiwibank, through to 13.5 per cent a year with no annual fee at ASB.

Standard credit cards usually charge between 20.95 per cent and 22.95 per cent.

Moneyhub spokesman Chris Walsh said it was noticeable that the recordlow official cash rate had not meant lower card rates.

At the moment, banks would probably see credit card debt as increasingly risky, he said, as the financial outlook for New Zealand households worsened.

‘‘As much as MoneyHub wants to see better credit cards offers, we understand the risk of collecting. Banks don’t share their default rate so we have no insights into whether or not the interest rates are proportional to the risk.

‘‘While we continue to see balance transfer offers, these low interest rates are a promotion and not representative of the credit card interest rates currently charged. If financial conditions of households deteriorate, we will likely see credit card application approvals become more strict and/or even higher interest rates for some cards.’’

Banking expert Claire Matthews, of Massey University, said credit card rates stayed put because there was not as much customer scrutiny on them.

‘‘The interest rate on credit cards makes very little difference to people’s use of them, and choice of cards – otherwise everyone would move to the low-interest options available and then you would likely see the others move.

‘‘There is a limit to that, because some years back when interest rates were higher there was an attempt to move credit card interest rates over 20 per cent, which did get a lot of pushback,’’ she said.

Many people did not know what interest rate they paid on their cards, she said.

‘‘In addition, people mislead themselves into thinking the interest rate doesn’t matter because they won’t be paying it. If you pay your full credit card balance by the due date every month, you don’t pay any interest so the rate doesn’t matter. Unfortunately while many people plan to do that, it doesn’t work out and they do pay interest – but ‘next month will be different’.’’

While New Zealanders are carrying relatively large balances in aggregate – there was $5.8 billion owing in April – individual balances were often small.

That diminished the impact of a credit card’s rate on individuals, Matthews said, and made it seem less important. But she said credit cards were a significant source of revenue for banks, contributing income from outstanding balances, cash advances, cardholder fees and the merchant fees paid by retailers.

New Zealand Bankers’ Association chief executive Roger Beaumont said the rates were higher because the loans were unsecured – there is no house or car for the bank to sell to recover debt if you stop paying.

‘‘There is a fairly wide range of credit cards available in the market. Premium cards with higher rates often include benefits such as loyalty schemes and travel insurance. Lower-rate cards tend not to have those benefits.

‘‘It’s a good idea to talk to your bank about a card that suits your circumstances and how best to manage it.’’

John Kensington, head of banking and finance at KPMG, said the margin that banks made on lending had to cover their costs, the administration of the loan and any level of losses.

‘‘As such a mortgage is probably an easier product per dollar of principal lent to manage – there are fewer of them and set up and run for eight to ten years with pretty full compliance with the terms throughout the life.

‘‘Whereas a credit card is typically unsecured lending and will have similar levels of base cost to the lending but the administration will be higher per dollar lent – more inquiries, replacement cards . . . but the major difference will be around losses.

‘‘They will be higher because they are not secured and therefore the margin needs to be higher to compensate for the fact there is no asset to sell to recoup any losses – it is a risk versus reward question.’’

A Kiwibank spokeswoman said a term deposit or home loan was an agreement for a set period, which made it easier for the bank to price.

‘‘With a credit card there is much more flexibility – you pay as much as you want when you want.’’