Australians are deluded and ignorant about the deals they are getting on their credit cards, and it’s allowing banks to get away with outrageously high interest rates and fees.
That is the main message from a new survey of 2200 credit card users by ME (formerly ME Bank), released to coincide with the second hearing of a senate inquiry into credit card fees.
The survey found that the vast majority of Australians are totally disengaged from the credit card market, and are settling for interest rates as high as 20 per cent.
One of the most surprising figures was that 73 per cent of consumers said they didn’t know the interest rate on their own credit card, while 40 per cent didn’t know whether or not they were paying an annual fee.
Despite this high level of ignorance, 65 per cent of consumers said they were confident they have the best card to suit their needs, and 78 per cent have never switched cards.
ME’s Head of Deposits and Transactional Banking, Nic Emery, said: “Credit card providers wouldn’t be able to charge so much if people were more vigilant and exercised their right to switch.”
He warned consumers to be “wary of cards with extra features, which usually attract higher rates and annual fees”.
“The average interest rate across ‘rewards cards’ is 19.5 per cent while the average across ‘non-rewards cards’ is 14.1 per cent,” he said.
“It’s also important to be aware of introductory offers that start off low, but spike after the ‘honeymoon period’ is over. A lot of people think they can pay balances within the time frame, but in reality many don’t.”
Are high interest rates really so bad?
As a low-interest, no-frills credit card provider itself, ME has an interest in encouraging people to avoid high interest cards.
But are high interest rates really so bad?
According to comparison site Mozo, the average interest rate on credit card purchases in Australia is 17.61 per cent. The average annual fee, meanwhile, is $115.
But it’s important to remember that that rate only kicks in if you are late paying your credit card bill.
According to the Reserve Bank of Australia, just under 30 per cent of credit card users are so-called ‘revolvers’ – that is, they do not pay their credit card bills in full, and therefore attract interest.
So while everyone pays the annual fee, it’s the revolvers who are affected by high interest rates.
With unemployment on an upward trend and economic growth stalling – it was just 0.2 per cent in the June quarter – the number of people struggling to pay their credit card bills is likely to rise.
For those consumers who find themselves utterly unable to pay their bill, there is a minimum repayment.
That average minimum repayment currently stands at 2.32 per cent of your total debt, according to Mozo.
Mozo says that this low rate, combined with compound interest, means it would take more than 20 years to pay back the average debt of $4502.
This would mean you’d end up paying an extra $9096 in interest and fees on top of the $4502.
This illustrates the fact that borrowing money through a credit card makes no financial sense and is basically a gift to your bank.
Mozo is campaigning for the minimum repayment to be raised to 5 per cent to minimise this kind of gouging.
The senate inquiry
The senate inquiry heard on Thursday from a number parties, including the Consumer Action Law Centre.
In its submission to the inquiry, the CALC made 19 recommendations, including more disclosure requirements for credit card providers, giving regulators more power to enforce rules, and more resources to provide “financial counselling” to people in credit card debt.
One of the most interesting recommendations was the introduction of “account number portability”, which would allow customers to take their credit card number with them to other providers, similar to mobile phone number portability.
The CALC said this “could make switching credit cards simpler and easier for customers by allowing them to change banking service providers without changing their bank account or credit card number”.