While credit card cash rates are at an historic low, interest rates on these cards remain at a record high, leaving finance experts questioning whether Australia’s big four banks, are “gouging” consumers.
The Reserve Bank of Australia (RBA) is under pressure to explain the issue. Senior officials of the RBA were subjected to a Senate estimates committee in Canberra yesterday afternoon, amid concerns the four big banks, who control half of the credit card market, are pocketing the rate cuts for themselves.
The cash rate for credit cards is currently sitting at a record low of 2 per cent. However, credit card rates have remained steady and high, prompting questions over where the excess rates are going – and who is benefitting.
Business Editor for the ABC, Peter Ryan says credit card cash rates have fallen 2.75 per cent since late 2011, but the “spread between cash rate and credit cards is at the widest point since 1990” when the records first began.
The Australian Bankers’ Association, which represents the four big banks, denies that consumers are being overcharged, stating that “The Reserve Bank of Australia cash rate has marginal impact on credit card interest rates” and “Credit card interest rates vary considerably and will be determined by factors such as the risks of unsecured lending and the various features a card has”.
Credit cards represent a very profitable part of Australian banking. Ahead of the committee, Labor Senator Sam Dastyari stated that there was nothing wrong with people making a profit but “We have to make sure that this is a proper, competitive environment and that Australian consumers are not being ripped off”.
During yesterday’s Senate estimates committee, Senator Dastyari was concerned that high credit card interest rates mean many bank customers are becoming trapped in debt and unable to escape.
Following an internal review of the margin by the Treasury a number of months ago, Treasury secretary John Fraser told the committee “My personal view is that it is an issue well worth further, deep investigation and consideration”, as the gap seemed to be widening.
RBA assistant governor Malcolm Edey admitted the “margin does look big” but “We don’t really have a good answer” as to why. “If people are interested in knowing why that is, we are happy to have a looked at it and find out more about that”, he said.
Read more at ABC.
Read more at the Sydney Morning Herald.
For many Australians, credit cards are essential to help to cover costs when their income cannot. Australians rely on their credit cards to help them get by in one of the highest cost-of-living countries in the world. However, with the ludicrously high credit card interest rates we are experiencing, they’re really a double-edged sword, helping out in the short-term only to cut more deeply when repayments are due.
Consumer advocacy group CHOICE conducted a Consumer Pulse survey in March and found that 1 in 5 people in Australia were living off a credit card to cover the gap until pay day.
The defence of the Australian Bankers’ Association that interest rates will vary considerably and be determined by the extenuating circumstances of the card holder sounds a little like telling consumers: you’ve chosen to have a credit card, so you’re on your own.
With some credit cards charging around 20 per cent interest, the issue is now out of control, and the need for greater competition is obvious. CHOICE is encouraging consumers to stop using credit card products offered by the big four banks and look around for a better interest rate through credit unions and smaller lenders.
CHOICE spokesperson Tom Godfrey says, “The big banks are punishing their credit card customers with crippling rates of interest and with official rates at record lows we deserve to know why the banks are failing to pass on savings.”
Read more information on how to choose the right credit card.
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