Rates on hold…indefinitely so for credit cards?

3rd of December 2013 | by Laine Gordon

The Reserve Bank of Australia passed on the last chance for the year to boost borrower confidence before Christmas, by keeping the official cash rate on hold at 2.5 percent today.

Despite no move today, the official cash rate has fallen by 0.50 percentage points since the start of the year, with the biggest cuts handed down to savers, according to Australia’s leading financial comparison website, RateCity (www.ratecity.com.au).

On average, online savings accounts have been cut by 0.54 percentage points, while basic variable home loan interest rates have dropped by 0.52 percentage points.

But there is one group that is often overlooked in the interest rate debate and that’s credit cards, which are expected to get a work out over the Christmas period.

Alex Parsons, CEO of RateCity.com.au, said crunching the numbers reveals that rates on plastic have barely budged over the years and are now out of step with the official cash rate.

“Credit card rates rarely make the headlines, but a look at the figures shows just how little they have changed,” he said.

“Since rates first started to drop in November 2011, the cash rate has fallen by 2 percentage points, yet the average purchase rate on credit cards has come down by just 0.30 percentage points in that time.

“Here’s a simple way to think about how high credit card interest rates are – the average credit card rate is more than six times the RBA’s official cash rate. The cash rate is 2.5 percent, and the average credit card rate is 16.89 percent.”

RateCity research found that for a $5000 credit card debt at 16.89 percent, and making a minimum repayments of 2 percent, a cardholder would pay $14,800 and take almost 29 years to clear the debt.

Parsons added that credit cards are complex products, and often poorly understood, and for those reasons consumers tend to pay more than they need to for credit cards.

“Credit card rates are higher than mortgage rates because lending is unsecured, default is higher and the rate of debt recovery is lower,” he said.

“But it’s one area of the banking and finance market that is incredibly competitive, where switch costs are low and information is plentiful. So there’s really no reason to be stuck with a high-interest credit card.”

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