The official cash rate is at the all-time low of 1 per cent. Some mortgages have dipped below 3 per cent. The average savings account is returning well below 1 per cent.
So why are Australians still paying around 20 per cent interest on credit cards – a figure largely unchanged for the past decade?
Research by comparison site Finder.com.au has found that average credit card interest rate has never been further above the official cash rate than it is today.
Finder’s analysis showed the credit card interest rate had blown out to 13 times the cash rate, compared with five years ago when it was eight times the cash rate. Fifteen years ago, it was even lower, at just three times the cash rate.
Insights manager Graham Cooke said credit card interest rates had maintained roughly the same margin above the cash rate from 1991 until 2010. But then it began to diverge.
Mr Cooke said despite the official cash rate being slashed from 4.75 cent in December 2010 to 1 per cent today, the credit card rate had barely changed in that time – an average of 19.77 per cent in December 2010, and 19.86 per cent in June 2019.
“If the banks had passed on the rate cuts as they have in the past, that would make the average standard rate [on credit cards] today just 15 per cent,” Mr Cooke said.
A spokesperson for comparison site Ratecity.com.au told The New Daily that only five out of 65 credit card providers dropped interest rates by between just 0.15 and 0.25 percentage points after the RBA’s June rate cut.
And since January 1, six providers actually increased their interest rates, largely Westpac and subsidiaries which increased rates by 0.25 points.
According to their database, rates averaged 17.13 per cent, ranging from a low 7.49 per cent (G&C Mutual Bank Low Rate Visa Credit Card) to a high of 24.99 per cent.
One bank source, who declined to be named, said banks were compelled to charge more for credit card interest because it was an unsecured debt – that is, it had no collateral backing, and so was a higher risk.
But Martin North, principal at Digital Financial Analytics, said banks had for some time been “quietly milking borrowers who use credit cards”.
Mr North said only about a third of credit card users used the credit facility, but they are typically households under “greater financial stress” than most.
“Banks would argue that because there is higher risk attached to those credit cards, they have to charge a higher interest rate,” he said.
“Sure there’s risk, but in fact the total value of debt held in credit cards is going down due to staged-payment credit [such as Afterpay], personal loans and debit cards.
The bottom line is, the credit card business is still very profitable for the banks.’’
Mr North said banks claiming the higher rates were because they were not secured against assets – unlike mortgages – was a furphy.
“That still does not explain why those rates have not moved in line with cuts in the cash rate. The relativities should still be the same.”
Mr North said rates have been largely unchanged since late 2011 because banks saw an opportunity to claw back some of the profits eroded by the global financial crisis.
“Basically banks profits were under pressure at that time, and the credit card was the way to achieve that [lost profit],” he said.
Good time to shop around
RateCity.com.au research director Sally Tindall said with the official cash rate so low, it was a good time to shop around for a better credit card rate.
“If you move from the average credit card rate of around 17 per cent, to the lowest rate on the market, you could knock almost 10 percentage points off your credit card interest rate,” Ms Tindall said.
Mr Cooke agreed, noting while many conventional cards with points-based loyalty programs might attract higher interest rates, there were several no-fringes cards among Finder’s database with rates as low as 11.99 per cent.
“Many cards also offer promotional deals with no interest for new customers – there are currently found cards on Finder with no interest for up to 15 months. This can potentially save cardholders hundreds of dollars in interest charges.”