The Reserve Bank has cut its overnight cash rate by three whole percentage points since September. Treasurer Wayne Swan says the banks should be lowering their credit card interest rates to better reflect the current level of official rates but so far the banks, with the exception of Westpac, have been slow to respond.
Westpac’s interest rate reductions came into force on Monday: the rate on its Low Rate Credit Card was cut by 0.65% to 11.99%; its Virgin Credit Card had 1.25% shaved off the interest rate to bring it to 12.99%.
Image by SqueakyMarmot
AVERAGE STILL HIGH
Westpac’s card rates are headed in the right direction but the average interest rate currently being charged on “low rate” credit cards is still 12.76% (based on the 20 cards with the lowest rate for a $20,000 credit limit currently listed on Rate City).
That is 3.8% higher than the MECU Low Rate Visa Credit Card which currently has the lowest available rate at 8.99% and 0.97% higher than the Bank West Lite Mastercard (11.79%), the cheapest card to offer 55 interest-free days.
The average rate on cards with long interest-free periods and reward programs is currently around 19.6%, which is currently giving the banks an extraordinary profit margin on some cards.
MORE CUTS IN THE PIPELINE?
The banks justify the high rates they continue to charge on credit cards on the basis that such debts are unsecured and therefore come with a higher risk to the lender that has to be reflected in their pricing.
They also argue that Australia’s current credit card debts of $40 billion pale into insignificance next to our $1 trillion mortgage burden and that they can provide much more economic relief by reducing mortgage rates than they can by reducing their card rates.
And they claim their funding costs (the price they have to pay for their money supply) remain too high to justify passing on rate cuts to their credit card customers.
As a result there has been some downward movement in rates over the past couple of months but the banks are moving in small, incremental steps.
Luisa Ford from NAB reports all NAB card rates have been reduced by 0.75% in the past two months. “We are reviewing them to see what further moves we can make,” says Ford.
ANZ reduced the rate on some of its cards by 1% following the last Reserve Bank official interest rate slice at the beginning of the month. CBA cut all its cards by 0.4%.
IT’S UP TO YOU
The banks are pretty steadfast in their refusal to bow to pressure from the government or media to slash credit card interest rates. That means it is up to you to take advantage of the most competitive deals available.
For example, the Macquarie bank is currently offering 0% on all balance transfers for four months on its Visa RateSaver Card. It’s ongoing rate on purchases is 11.95% which sees it ranked as the fourth cheapest card in its category and it offers 55 interest-free days.
JUST READ THE FINE PRINT
Woolworths Everyday Money has a 0% offer on its new Mastercard. Its current advertised rate is 0% on all purchases until 1 February and you pay 5.99% on balance transfers for the first six months. Just make sure you read the fine print on any offer that sounds this good.
The reward program attached to this new card is obviously designed to get people shopping at Woolworths with three points for each dollar spent on the card but this promotion comes with a sting in its tail. After 1 February the rate reverts to 18.99% on purchases and 21.99% on cash advances.