Credit card rates remain high despite falling cash rate
Cash rates in Australia have been reduced from 4.5% five years ago to a current low of 2%. Mortgage rates have more or less been reduced but focus of late has switched to credit cards, where there has not been a corresponding downwards move.
This has caused scrutineers to question whether it is a case of price gouging.
There are a number of fundamental differences between mortgages and credit cards.
Cards have a relatively low average balance, are unsecured debt and entail a significant number of transactions each month. The underlying economics of the two are profoundly different, with the funding costs on a mortgage being a much greater percentage of product costs than for a credit card.
The interest rate is one element of a card's potential revenue stream and is relevant only to cardholders who repay less than the total outstanding balance.
Other revenue streams include annual fees and exception fees. Annual fees for most cards were virtually static between 2010 and 2013, except for platinum reward cards. However, the exception fees on credit cards fell 21% to $232 million.
A number of other factors need to be considered in determining if the failure to reduce rates on credit cards could be considered to be unreasonable behaviour.
The growth in card use over the past five years has not been accompanied by a growth in balances on which interest is being paid. Credit card issuers have encountered significant additional regulatory costs in recent years.
Additional disclosure requirements, an altered hierarchy of repayment allocation and restrictions on credit limit reviews have added costs or reduced revenues.
When these are considered within the context of the substantially reduced exception fees and a significant decline in interest earned relative to card spend, the increase in net margin on cards flowing from the reduced cash rate does not appear to me to be unreasonable.
Cardholders seeking to reduce their interest payments on credit cards should: a) look at switching to a low-rate card; b) explore competitive balance transfer offers; c) plan an aggressive repayment plan; and d) resist the temptation of unplanned future discretionary spend on the card.