Australia’s big banks have come under fire for charging ‘exorbitant’ interest rates on credit cards tied to Virgin Australia’s frequent flyer program.

Consumer advocacy group Choice said Virgin Velocity credit card providers – including major lenders NAB and Westpac – are charging customers variable interest rates in excess of 20 per cent despite uncertainty about the future of the rewards program.

The airline imposed a four-week points redemption freeze last month, putting at risk the balances of 10 million Velocity members.

Last week Virgin said customers can once again redeem points, but only for domestic flights.

Choice’s open letter comes as four bidders battle to buy the nation’s second largest carrier, which was forced into voluntary administration after harsh coronavirus measures gutted domestic and international air travel.

Choice banking consumer advocate Patrick Veyret said although providers have suspended new frequent flyer credit card sales over the short term, existing card holders are still paying the price for deceptive marketing.

He said many lenders downplayed the risk of sky-high interest rates by focusing on the benefits of joining a frequent flyer program and the promise of zero per cent balance transfers.

“It’s simply indefensible that banks continue to charge people interest rates in excess of 20 per cent on frequent flyer cards … [when the] Velocity program remains essentially frozen,” Mr Veyret said.

A NAB spokesperson told The New Daily although the bank has not sold new co-branded Velocity cards “for a number of years”, it will work closely with Velocity to provide information and support to existing Velocity credit card customers.

But Choice is pushing major lenders like NAB to cap credit card interest rates at 10 per cent.

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Canstar financial services executive Steve Mickenbecker told The New Daily credit cards connected to rewards programs should only be accessed by customers who can repay their balances on time and in full every month.

For those who find themselves in arrears, the various perks of rewards programs pale in comparison to enormous interest rates.

The fact that some people are paying interest rates at 20 per cent and more suggests they are on the wrong card,” Mr Mickenbecker said.

Although Mr Mickenbecker believed Choice’s proposal will likely force lenders to reconsider their policies, he said the proposal’s design could skew the economics of rewards cards, which are already high risk.

“If you leave customers in that [rewards card] and just cap the interest rate, what will happen is the annual fee will go up astronomically, or the amount of points customers can redeem will be capped,” Mr Mickenbecker said.

“There are alternative solutions, including making it an obligation on providers to inform their customers they are paying too much interest and directing them to a lower-price card.”

Consumer Action Law Centre CEO Gerard Brody applauded Choice for compelling banks to slash interest rates during a time of “large economic upheaval”.

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He said the major banks’ “proactive campaign” during the pandemic, which has included waived late payment fees and home loan deferrals, has helped customers in new-found financial hardship.

But he said lenders could go one step further and introduce measures to ensure customers only sign up to credit cards that fit their financial circumstances.

“Banks shouldn’t be selling high-cost credit cards to those that aren’t going to pay back the balance before the interest starts accruing,” Mr Brody told The New Daily. 

“The banks have a lot of information about a customer’s transaction history, so they’re well placed to know what is the best product for them.”

The New Daily contacted Westpac for comment, but the bank did not respond before deadline.