Credit cards: it's how the bankers screw the battlers
Date
June 24, 2015
Canberra Times
The biggest financial obligation that Australians have after their homes and cars is credit card debt, $50 billion of it. More than $33 billion of this is accruing interest, often at eye-watering rates over 19 per cent per annum.
Financial counselling agencies around Australia are increasingly helping people with credit card debt worth $50,000 or more. This debt is usually across multiple cards, with aggressive marketing meaning some people are paying down credit card debt with new credit cards. All the while, the banks are raking in huge profits from people who are struggling financially.
Banks are exploiting the lack of competition in a market that relies on struggling Australians to regain their profits.
The average credit card balance in Australia is around $3,200, and the average balance which is accruing interest is a little over $2,000, but averages hide the full story.
Many Australians have debt across multiple credit cards – a cycle that must change with improved lending criteria.
Many credit card users – more than a third – are known in the industry as "transactors". They tend to pay back their balance before the expiry of the interest free period, and pay very little for the use of the card. Transactors are likely to use a reward program and, if so, the bank is probably making little money from them.
At the other end of the spectrum are "revolvers" – those who are unable to pay back their balance in full at the end of the month and are paying interest. Constant revolvers are people who are paying interest month-to-month, and it is this group that is struggling financially. It's these Australians who are the most profitable to the banks.
Reports this week that the Senate Economics Committee will inquire into the credit card market are timely. Since cash rates started falling in 2012, average credit card rates have hardly moved down at all. The average rate on a standard card is around 19.5 per cent, and on a low rate card it is 13 per cent. With the cash rate a low 2 per cent, it's no wonder senators are concerned about the impact of these high rates on households.
Consumer Action Law Centre CEO Gerard Brody believes there needs to be more competition in the credit card market.
Persistently high credit card rates indicate a failure of competition. In most consumer markets, competition should bring down prices, but that's not what has occurred with credit cards. There are a number of reasons why competition is not working as it should.
First, it can be very difficult to switch your credit card from a high rate card to a low rate card. Credit cards are often bundled with other banking products such as a home loan or transaction account. Unbundling may mean that you lose special deals on your other banking products.
Second, more and more of us also have automatic deductions on our credit cards, paying our monthly insurance premiums, gym memberships or newspaper subscriptions. Unlike direct debits on transaction accounts, you cannot cancel these arrangements directly with the bank but must contact each merchant separately. The hassle factor means that consumers can give up.
Where banks do compete, it is usually in relation to zero per cent interest balance transfer cards which are marketed aggressively. However, the teaser rates on these cards generally do not apply to new purchases, and fees can be applied to the balance transfer. At the end of the introductory period, the interest rates bounce back to the unsustainable rate you were trying to avoid in the first place. There's no doubt that the ideal customer for a bank is someone who is unable to repay their balance within the interest-free period. It is this group of customers that can be paying $1,000 a year in interest charges or more.
In 2012, banks were prohibited from promoting unsolicited credit card limit increase offers, unless consumers had consented to receive them. Credit card providers were also required to direct repayments to the most expensive part of credit card debt first – making it easier to reduce debt. And monthly statements had to include personalised information such as how long it would take to pay off an entire balance if you only make minimum repayments.
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