Banks’ credit card distraction tactics are plain cheeky
The interest rates charged remain hefty, so perhaps it’s time to send providers a message, writes Kate Sluka.
If you have a floating-rate mortgage, you’ll have been very happy watching your interest rate drop over the past 12 months.
Drops in the official cash rate (OCR) set by the Reserve Bank have been passed on at least to some extent by the banks. But you’d be right to feel grumpy about the interest rate on your credit card.
There’s a chasm between mortgage rates and credit card rates and it’s widening. The top rate for standard credit cards hovers around 20 per cent for purchases and hasn’t moved from this height for ages.
That’s about 15 percentage points higher than the average floating mortgage rate.
Until now, we haven’t been complaining. The banks have done a neat job of diverting attention away from credit card rates by waving ‘‘balance transfer deals’’ with low or zero per cent interest.
It’s cheeky. They’re enticing people from other banks and bagging their competitors’ high interest rates, while offering exactly the same high rates on any spending outside the transferred balance.
The shiny distraction of credit card rewards and airpoints also keeps us from looking too closely at interest rates.
And who’s paying for those rewards and airpoints? You are, with that hefty interest rate and fees.
Raise the issue of credit card interest rates with banks and their response is there’s no link between the OCR and their rates.
They see credit cards as an unsecured loan. The rate you pay reflects the risk they’re taking.
The OCR is just one of many influences on their cost of funds, they say. They then point out their range of low-rate cards, balance transfers, interest-free periods and how customers can avoid paying interest. Look, we’re competitive! See! Shiny stuff!
But it’s disingenuous to blame high interest rates on the risk banks are taking. Many credit card terms and conditions allow them to use the balances of your other accounts with the bank to offset debt on your credit card. So they’re hardly unsecured.
Well, we’re paying attention now. And we’re wanting a change. As at December 2015, we owed nearly $4 billion in interest-bearing personal credit card debt.
We’re clearly not paying off our cards in full each month. Many of us are paying a whack of interest.
For consumers to have confidence the market is operating fairly, reductions in the costs banks face should be reflected in credit card interest rates. The OCR might be only one influence on the cost of funds, but we should have seen movement in rates by now.
And we haven’t. Not on the high rates. Not on the lower rates. Even the minimum payments the banks ask from us each month to keep the card going are designed to keep us in debt – in many cases for years.
Consumer NZ is calling on credit card holders to send a message to their bank about credit card interest rates. We’ve got a sample letter you can email on our website, at consumer.org.nz.