Exorbitant credit card rates are back in the spotlight.
This time it was Victorian Treasurer Tim Pallas who took banks to task for slugging consumers with massive fees in an age of ultra-low interest rates.
On Sunday Mr Pallas urged the federal government to tie credit card interest rates to the official cash rate, which the Reserve Bank left on hold at 0.1 per cent on Tuesday.
According to consumer advocacy group Choice, 12 credit card companies last year were charging higher rates than in 2017, with some charging more than 20 per cent.
By contrast, some home loan interest rates are now lower than 2 per cent.
Consumer watchdog should investigate
Financial Counselling Australia chief executive Fiona Guthrie said the Australian Competition and Consumer Commission should investigate how banks determine the rates on their credit cards.
“There is something really strange happening when the cash rate is so low and credit card rates are so sticky,” she said.
“For people who are renting and don’t have other assets this (credit card debt) could be their major debt and when those interest rates are so high, it just makes it really hard for people to ever see a way out.”
Australians made 130,000 calls to the National Debt Helpline in 2020.
This was down from 180,000 in 2019, thanks to record levels of government support payments.
But Ms Guthrie said although there were fewer calls in 2020, financial counsellors reported the calls were more complex because people were highly anxious, suffering relationship stress, and faced with cutting back on essentials such as food and medication.
Choice campaigns director Erin Turner said interest rates in the credit card market were too high and didn’t reflect banks’ lending costs.
“It looks like it’s a pure gouging of consumers and a really broken market,” she said.
“Credit card interest rates have been too high for too long.”
It comes after Reserve Bank governor Philip Lowe last month urged Australians to shop around for better credit card deals, expressing frustration that some interest rates were still as high as 20 per cent.
So, if you’re stuck with a whopping credit card debt, what is your best plan of attack?
Seven steps to become debt-free
1. Get help
Ms Guthrie said the first step is to confront rather than avoid your debt, to prevent the situation from worsening. Independent financial counsellors are available at the National Debt Helpline on 1800 007 007.
2. Work out what you can afford to pay
Calculate your expenses and income – including any government benefits – and be realistic about what you spend. Include things like presents and haircuts, and be sure to allow enough for food.
The National Debt Helpline suggests budgeting $130 per week per person for groceries.
It’s also important to set aside some money – about 10 per cent of your income – in the event unexpected expenses arise.
3. Contact your lender
Certified financial planner Amanda Cassar, of Wealth Planning Partners, said people should shop around using comparison websites, then contact their credit card company and ask for a better rate.
“Threaten to walk away if they don’t come to the party,” she said.
4. Prioritise your debts
Ms Cassar says if you have more than one credit card debt, pay down the one with the highest interest rate first.
5. Review your budget
Look for ways to cut back in areas such as pay TV subscriptions, gym memberships, takeaway coffees and eating out – and put those savings towards paying your debt.
“If you go, ‘right, I’m not going to have my coffee every day, that’s $5 each day I’m saving’, make sure you transfer that money straight onto your credit card with the highest rate so you are starting to chip away at it,” Ms Cassar said.
You can also save money to put towards your debt by negotiating better deals on larger expenses like private health and car insurance.
6. Reward yourself
Motivate yourself by reinstating some cutbacks like takeaway coffees or TV subscriptions once you have wiped your debt.
7. Balance transfer
You can transfer the balance of your credit card onto another credit card and take advantage of a zero-interest period. But cut up your new card as soon as it arrives so you won’t be tempted to use it.