Rigged system putting the big squeeze on credit consumers
THE legendary investor Warren Buffett reminded his shareholders in 1988 that “if you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy”.
For the past five years interest rates on mortgages have continued to fall but consumers have not had their voices heard on stubbornly high credit card interest rates. In this game of credit card poker we are the patsies.
Yesterday, this paper outlined a consumer campaign to shake up the credit card market by encouraging consumer action. It deserves support. For those taking part there is no doubt there are better deals out there to be achieved.
But consumer action alone can’t address underlying problems in the credit card market. Consumers need more information and better laws.
Over the past few weeks I have been chairing a bipartisan Senate inquiry initiated by Bill Shorten and supported by Liberal Senator Sean Edwards to explore if consumers are getting a fair deal from credit cards. Sadly, Tony Abbott and Joe Hockey don’t agree this is an issue we should be talking about. It’s hard to see why because the evidence is damning.
Credit cards are a cash cow bringing in around $8.5 billion of revenue for credit
card providers every year. With 16 million cards in circulation, it is also a growing problem. Over the past decade there has been a 50 per cent growth in credit card balances and credit card debt is more than $50 billion.
Spare a thought for the hundreds of thousands of Australian’s heading into the Christmas season with credit card debt still outstanding from last year and little opportunity to ever get on top of it. The system is rigged against them.
The credit card industry likes to talk about “low rate cards” and refinancing options such as 18 month “interest free balance transfers”. Don’t be fooled. While there are lower rate options available, according to Reserve Bank data the spread between low rate cards and what it costs to borrow money (the cash rate) is still at a record high. And “interest free periods” are a trap. If you fall behind and default after 18 months you will likely be charged backdated interest on the entire 18 month period. These products aren’t being provided because credit card providers have suddenly had a guilty conscience and want to give something back to the community – they are marketing ploys.
What is the answer? Better competition and more informed consumers.
Changing credit card providers should be easy. It isn’t. As David Koch recently testified at a Senate hearing “you are more likely to leave your spouse than you are your bank”.
I heard evidence that one of our big four banks requires you cut your credit cards up diagonally (God knows what happens if you cut it up in squares) and send it back to them in an envelope before they will cancel your card.
In comings weeks, new ideas will be explored and outlined on how the rules can be rejigged in favour of consumers. Expect the credit card providers to fight this every step of the way.
In the meantime, stop playing poker unless you know all the rules – you won’t win. Labor Senator Sam Dastyari is chairman of the Senate Economics References Committee Join the Big Debt Switch to help unlock several deals that could lower the cost of debt for many households by going to moneysaverhq.couriermail.com.au There is no obligation to take up any offer. News Corp Australia and One Big Switch will earn a commission from any accepted deals. News Corp Australia is a shareholder of One Big Switch.