The Reserve Bank of Australia (RBA) has hit out at banks for not reducing credit card interest rates in line with lower cash rates and reduced funding costs.
In fact, the RBA says, since the global financial crisis (GFC), big banks have actually enjoyed a 3 per cent increase in margins on their $9 billion credit card income, helped along by advertised interest rates rising from 16 per cent eight years ago, to about 20 per cent currently.
The RBA says that despite a highly competitive market, interest rates on credit cards have remained ‘very sticky’ for almost four years, even though the cash rate has fallen significantly in the same timespan.
Interest-free balance transfers has given the ability for people to pay off debt much faster. Increased competition from non-bank lenders also means that, although there is a lot of confusion when it comes to credit finance, there is a wider range of choice available to customers.
Credit cards are “entry level lending” and are unsecured, which puts the banks at greater risk should a borrower default. But the rate of defaults has declined significantly in recent years – with the RBA estimating card losses have decreased from 2.5 per cent in 2010 to about 1.5 per cent currently.
Read more at Australian Financial Review
It’s easy to say that if the cash rate has been lowered, then the interest rates on credit cards should be reduced as well. But they are two different forms of lending with different associated risks and rewards.
Most Australians would have no problem qualifying for a credit card. Sure, the credit limits are contextual depending on income, but as long as you have some form of documented income, you should be able to qualify for a credit card with a minimum credit limit.
And, so long as you make timely monthly repayments, you may even improve your chances of qualifying for a higher credit limit.
But it is an unsecured line of credit – and banks have no way of recouping their money should a borrower run off with the lot. And this can, and does, happen. Hence the high interest rates.
We’d all love to see reduced interest rates on credit cards. And if the banks’ overheads are lower nowadays, and the risk of borrowers defaulting has also come down, well, there’s no excuse for not dropping them at least a little. Surely they can afford it. I mean, didn’t the Commonwealth Bank just enjoyed a five-year record profit?
Having said that, customers can get savvier and more active with their credit cards. Instead of remaining ‘comfortable’ with a known banking entity, many would have the ability to transfer remaining debt on a current card over to an institution that offers low- or no-interest on transferred balances. This type of action bypasses the interest rates for a short term, rendering them ineffective, and giving borrowers a chance to more quickly reduce their debt.
The power of managing credit debt is in the hands of the consumer.
What do you think? Do you think it’s time the banks reduced interest rates on credit cards? Is it still fair for banks to claim that higher rates are to cover themselves from the risk associated with unsecured lending, even when that risk is lower nowadays? Have you tried the zero-balance transfer scheme? How did it work out for you?