RBA call to reduce credit rates

The RBA has called out the big banks for not reducing rates on credit cards.

RBA call to reduce credit rates

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

Opinion: Is it time banks lowered credit card rates?

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?





    COMMENTS

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    Patriot
    20th Aug 2015
    7:11am
    Bankers are criminals who are provided with legal protection from "The Boys" in Canberra!
    I can express this many other, far more meaningful & expressive ways!!! However, I am sure the post would be deleted!
    Paulodapotter
    20th Aug 2015
    10:02am
    To be a banking CEO, one has to fit the profile of a sociopath or otherwise banks would become like any other instution, ie., obliged to act ethically. No such requirement is needed for banks who can change the rules arbitrarily to suit their own needs. Strangely enough, this helps to ensure they don't bankrupt losing all their clients' money.
    Adrianus
    20th Aug 2015
    8:55am
    I imagine the banks' losses on credit card lending have been quite high during the last 3 or 4 years, so now is not a good time to be asking banks to ease this lending rate. We stand a better chance of them dropping the rate if we were to put some pressure on the banks when unemployment is trending downwards and the RBA's cash rate is trending upwards. When interest rates are rising the banks seem to do very well and as a result their share price tends to rise. But now is not the time to put more pressure on our banking system while they are still recovering from 6 years of the anti bank party, Labor.
    Patriot
    20th Aug 2015
    8:59am
    Frank
    You are suggesting that "The banks have a HEART".
    I suggest that they, the same as the Politicians (in general) do NOT have one.
    That is, until they themselves are the beneficiaries!
    MICK
    20th Aug 2015
    9:33am
    Crap Frank. Banks have done very nicely. I own bank shares and these are my best performing asset. Always have been.
    Keep your trolling to yourself and stay on the subject.
    Adrianus
    20th Aug 2015
    11:22am
    Patriot I am suggesting none of what you suggest I suggested.
    Adrianus
    20th Aug 2015
    11:25am
    mick, in my opinion a flight to perceived security. Banks are struggling to maintain margins and have already raised the rate on investor mortgages.
    Patriot
    20th Aug 2015
    12:02pm
    Frank
    Banks "Create Money OUT OF THIN AIR"!!!!!
    How much do the rates need to be increased in order to support/maintain their excessive margins???
    Tom Tank
    20th Aug 2015
    12:12pm
    Frank you seem to be on a different planet to the rest of us as your take on banks is sooo way out.
    Adrianus
    20th Aug 2015
    12:54pm
    mick, about a month ago APRA announced an increase in the amount of capital required for Australian residential mortgage exposures by banks and other lenders.
    This change will mean that the average risk weight on Australian residential mortgage exposures will increase from approximately 16 % to at least 25 %. Therefore Banks have been raising this capital from either the sale of assets or from existing or new shareholders. Consequently I see a reduction in dividend yields over the next year or so. In case you missed it, over the last 6 months your CBA share price has dropped from $96 to $76.
    Batara
    20th Aug 2015
    4:30pm
    Frank, following that change you mention the interest rates on my investment loans have been increased to cover the extra costs. The topic here is credit card interest rates and the banks do exceedingly well out of those, thank you all the same.
    Adrianus
    20th Aug 2015
    5:40pm
    Batara the question remains the same. Why would a bank drop rates on any form of lending if it needs to raise it's capital reserves to meet regulatory requirements?
    MICK
    20th Aug 2015
    9:38pm
    Frank: you were ranting on about Labor and banks. Now you are complaining about banks needing to hold more cash. The latter was done BY YOUR EMPLOYER, this government!!
    I am aware of the changes coming. There is a predicted financial tsunami coming our way according to the smart money and this is in preparation for that. Who knows if it will eventuate or not. But in the meantime I'll hold a few bank shares no matter how it turns out.
    Helen-gran
    20th Aug 2015
    9:53am
    One of the most sensible comments I have read in the Opinion section on this website with often incorrect information is "The power of managing credit debt is in the hands of the consumer." For the first time in a long time - well said!
    les.61
    20th Aug 2015
    9:53am
    It would be interesting to see just how much they make from credit cards. Probably not as much as you think. The banks are the "Big Boys" but do you want a big safe banking system or a system like in Greece. Remember that many of you will have superannuation that is invested in banks and you are probably lucky you do. I also have bank shares (albeit only a small amount). I have a credit card and my wife has one with a different bank. In the last 20 years we have never paid any interest other then when I made a mistake and did not pay the full amount one month. Unsecured lending is risky and you have to get some form of return on it.
    Paulodapotter
    20th Aug 2015
    10:05am
    That's the way a credit card should be used Les61. Banks make their money via charges to businesses with EFTPOS facilities and service fees to card holders. The interest on credit cards is the cream on top of the cake less the losses due to fraud.
    Hasbeen
    20th Aug 2015
    11:44am
    It is easy to not give the banks big profits on credit cards, JUST DON"T HAVE ONE.

    I have never had a credit card in my life, & we cut up my ladies about 30 years ago. I do have a debit card, but never use it for anything but major expenses like insurances, rates electricity, registrations & phone/net costs.

    My kids have copied this, after a couple of mistakes when younger.

    Recently one closed their PayPal account for the same reason. He found he had spent $3000 in under 3 months on things he did not need, some of which he doesn't even use much. On the net, with PayPal they were just a click away, &It did not seem like spending money. He would not have walked into a shop & bought these things with cash.

    He was spending money he had in his account, so not a debt trap like a credit card, but much easier to spend money on things that might be fun, but you don't need, when you don't have to pull it out of your wallet, or go th the bank to get it out.
    MICK
    20th Aug 2015
    9:41pm
    Consumers who have no self control end up with no money. Doesn't matter what sort of card you have, although with a credit card you are spending money you do not even have,
    Some people are destined to fail. It is sad.
    KSS
    20th Aug 2015
    12:12pm
    This is all very simple. Stop blaming everyone else for your own poor financial management.

    If you cannot afford to pay off your credit card in full every month - you cannot afford to have a credit card.

    If you do pay off the balance every month - then what does it matter what the interest rate is? You won't be paying it.
    Patriot
    20th Aug 2015
    12:18pm
    KSS,
    Agree in principle!
    Unfortunately, things are getting "Very Tight" out there and - in some cases - the card is used to cover emergencies. A few such emergencies could put such families in a "Downward spiral" from which recovery is almost impossible.
    KSS
    20th Aug 2015
    12:37pm
    There is no excuse for 'stealing' which is effectively what people are doing who use a credit card knowing they cannot repay the money. Look around Patriot at what these people may have but don't need and all on the 'plastic'. But putting the blame on the banks and the interest rate is quite simply trying to outsource responsibility for one's own actions.
    MICK
    20th Aug 2015
    9:42pm
    Anybody who runs up debt on a credit card they know they will not be able to pay out in FULL when due is nuts!
    Couldabeen
    20th Aug 2015
    12:55pm
    Just because the Reserve Bank of Australia says "jump" there is no legal obligation for any financial institution to jump. They are all businesses with an obligation to their share holders and customers. If we, as customers are not happy with the terms and conditions of the services that we use from our financial service provider, we can tell them to go jump and shop around for better services.
    Our credit cards are essentially a low risk method of carrying a very fat bank roll around in our pocket. The convenience of having immediate access to significant spending power without the danger of being robbed by a pick-pocket or mugger.
    My service provider offers both a "fee free" and a "zero interest period" credit card, I go with the "fee free" and have never paid as much in interest in a 12 month period that the "zero interest period" card would've charged.
    We all have a good idea about what we are going to put on our cards each billing period, it is only a couple of key strokes to load your credit card with sufficient credit to ensure that you rarely get charged more than cents for interest. When I pay such large bills as power and car insurance and registration, I usually try and make sure that I pay these off, with extra for smaller ones such as phone and internet, within 24 hours of incurring the charge on my card account.
    Young Simmo
    20th Aug 2015
    3:07pm
    Credit card interest rates don't worry us because we never pay interest.
    In 2000 when we bought our first computer we took out a $500 limit Visa card so we couldn't get screwed for a heap. We pay it off every pension day, and have only ever paid the annual fee, about 70 bucks, and not cent in interest. If we won't to use it for a new fridge or something to get the rewards, we just top it up with a thousand or so.
    Mike Omment
    20th Aug 2015
    3:35pm
    I must confess I don't know a lot about the banking system but I know it needs to be strong and profitable for our economic well-being
    Adrianus
    20th Aug 2015
    4:11pm
    Another reason not to return this labor party.
    Batara
    20th Aug 2015
    4:34pm
    Frank, where did that comment come from? Or rather what is the relevance?

    The banking system is very strong. Look at banks around the world and compare them to Australian banks. We should have no concern that our banks need us to kick the tin to help them out.
    Adrianus
    20th Aug 2015
    5:31pm
    Strong for what Batara? Why would APRA insist on increases in capital reserves to cover exposure to res mortgages?
    MICK
    20th Aug 2015
    9:44pm
    My comment was a statement of fact. Yours Frank was a political advertisement. You are so full of it.
    MICK
    20th Aug 2015
    9:49pm
    And as for your last comment Frank you have so little understanding of WHY the banks are being asked to hold more cash. There is quite a lot of concern that Australians own houses which will drop in value like a brick if there is a financial meltdown. Obvious! People will be leaving the keys on the kitchen table and walking out. Declaring bankruptcy. Then the banks will make the loss. But it gets worse.....APRA already has Cyprus style bail-in arrangements in place in its documentation, so anybody dumb enough to a significant amount of money sitting in a savings account in one of the 4 majors is going to be getting a haircut.
    Get some better information from your sponsor Frank.
    Adrianus
    20th Aug 2015
    9:55pm
    I'm pleased you did your research and finally understand the situation. But the banks are already collecting some res real estate. It's already happening mick.
    particolor
    20th Aug 2015
    5:06pm
    Where's the REDUCTION in FUEL Prices ???? Its DOWN TO $40 a BARREL ?? :-( :-(
    MICK
    20th Aug 2015
    9:51pm
    And that particolor is worth a story on its own from the Yourlifechoices team. Petrol should be at around 70 cents per litre. Why is it staying at the same price as it was when oil was over $100 a barrel? And more importantly where are the politicians working in our interests?
    niemakawa
    20th Aug 2015
    9:57pm
    It is priced in USD and the exchange rate AUD/USD has dropped by a 1/3. All imorted goods are now more expensive or will be soon. Australia actually has suuficent natural resources to last hundreds of years, it is only the globalisation of industry / economies that is preventing us from being totally independent. Just think we could live in peace forever more!!!
    niemakawa
    20th Aug 2015
    9:58pm
    Particolor you can always increase your credit card limit!!!
    Captain
    25th Aug 2015
    5:32pm
    The Oz oil price is pegged to Singapore tapis crude (as at 24/08 is was $A64 per barrel).

    I agree that the price of fuel is too high, however the govt really does not want it lower as it affects their income, poor darlings.
    Adrianus
    25th Aug 2015
    6:16pm
    Yep, we can always bring back Kevin Rudd's Petrol Commissioner to monitor the prices. I've never seen a man smile so much at work. I guess the $330,000 salary had a bearing on his happy disposition. Or was he humoured by actually landing a job like that? That reminds me of another cushy high paying job created by Labor Qld. Mr Withers, a veteran bureaucrat, had been promoted by his wife to the rank of assistant director-general - earning $220,000 a year - after she controversially appointed him as head of the Office of Climate Change, which she created barely a month after she became premier in 2007.
    niemakawa
    20th Aug 2015
    5:52pm
    Most card offer a 30 day free credit period. Secondly credit cards are "unsecured" loans, which of course will attract a higher interest rate. Every individual that has a credit card ( or multiple ones) should set a "limit" on the amount of credit they choose. You can't always blame the banks for overspending. Best of all never pay the minimum amount due, that will only increase not only interest charges but the total repayment period. In summary use them wisely.

    20th Aug 2015
    6:28pm
    hallo what happened, particolar beat labor mick in having a go at to-days government on the new bait put out by life choise, if you are stupid enough to have a credit card, at least have the brains to pay it back on time, anyhow I got my own problems, have not decided on the venue, R.S.L or the local hotels for my diner, lambs fry with bacon sound better every time I think of it, keep on whinging and one day you may wake up life as a pensioner beat working anytime, have a great night
    Adrianus
    20th Aug 2015
    6:33pm
    Have a good night at the RSL heemsy!!
    MICK
    20th Aug 2015
    9:54pm
    And you wonder why some people have no money. Or brains. I am truly blessed that I was given the latter at least.
    niemakawa
    20th Aug 2015
    9:59pm
    Mick, proof please!!
    Not Senile Yet!
    21st Aug 2015
    5:47am
    We have regulated banks here in OZ.....regulated in that they have to report back to the government!!!
    The Government however, does not control them...nor should they!!!
    Credit Cards, like chocolate ice-cream and other luxuries are charges accordingly!!!
    However, having said all of that...I see no reason whatsoever why the Big 4 cannot reward their loyal customers.....say over 5 years....with a reduced rate on their credit cards!!!
    In fact the first Bank to do so may indeed be keeping that customer long term!
    It is time the Big 4 introduced a second rate on all credit for Loyal Customers......especially if they do not want to see the future generations switching Banks or deserting them altogether!
    As for forced reductions.....never happen.....it can only happen by competition!!!!
    But a person with a good credit rating is worth Keeping...surely???
    Rae
    21st Aug 2015
    8:10am
    Unfortunately that type of reward for loyalty no longer exists when dealing with corporations.
    You may be rewarded slightly for big spends using loyalty cards or by owner business people who value you as a customer.

    I recently found that I can save hundreds of dollars by changing insurance providers every year. The deals go to the new customer.

    If you pay off the total each month there is no interest charged. I use a direct debit from the saving account to do so and therefore avoid any mistake in the timing of the payment.
    Adrianus
    21st Aug 2015
    9:19am
    Not Senile Yet!,
    Unfortunately M1 is not like any other product.
    "I see no reason whatsoever why the Big 4 cannot reward their loyal customers."
    Credit Card lending is at the bottom end of the scale for banks and very little customer loyalty exists. Other lending ranks higher as does high number of accounts. Customers with very few accounts and no other lending will move their credit card debt in a heartbeat for a 6 month honeymoon. Rae is right and I find it annoying that big business does not reward loyalty enough.
    Strummer
    21st Aug 2015
    7:03am
    Whether or not you pay credit card interest is entirely up to you. How are the banks to blame for that.
    wally
    21st Aug 2015
    1:43pm
    The availability of credit cards have always been a double edged sword. They can "cut" both ways. Some people, by paying off their credit card debt every month, manage to make the credit card work for them. Other people that do not pay off their credit card debts every month find them selves "working for" their credit cards and get shafted with the high interest rates imposed by the credit (card) suppliers. The consumer can make his or her own luck with credit cards.
    LiveItUp
    22nd Aug 2015
    9:05pm
    I'm a credit card junkie but I don't care about the interest rate on credit cards as I never pay any. I do however enjoy a reduction in the interest on an loans I have as I use credit cards for most purchases and can use the money for up to 55 days to reduce this interest. I also enjoy a free airfare with the reward points every year or so.
    Not Senile Yet!
    24th Aug 2015
    6:16pm
    It is a small minded individual that follows others....for the want of a better way of putting it!!!
    We here in Australia are better than average in being inventive.....and it is out of date thinking.....to believe that not rewarding loyalty does not work!!!
    Large and small Companies are having great success in this area and have been for some time now!!!
    The Banks need to get with the times and offer better rewards for loyalty......especially those that have Good Credit Ratings....ie they pay when due!!!
    Change is Life!!! Life without innovation and No Changes would have never seen any Credit Cards whatsoever!!!
    Time they kept abreast of the Change and Lead it!!!
    As your view Frank......it belongs with the Pounds Shilling and Pence era......remember......a dream is only a dream when it is not acted upon!!!!!
    Adrianus
    26th Aug 2015
    8:05am
    I must be the senile one?

    25th Aug 2015
    6:29pm
    as for not senile yet, must be coming close
    Young Simmo
    25th Aug 2015
    11:33pm
    OK, can somebody give me the name of a couple of Credit Card suppliers that have no annual fees. I need the info for when I go and put the screws on the Commonwealth Bank


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