Is Rate Relief on the Cards?

Is Rate Relief on the Cards?

 

Westpac Bank has cut the interest rates on its credit cards by up to 1.75% but will other lenders follow?

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%.

Cut the interest rates on credit cards

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. 

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Learn more about credit cards

Current Interest Rate

This is the current interest rate on your existing credit card.

Can a pensioner get a credit card?

It is possible to get a credit card as a pensioner. There are some factors to keep in mind, including:

  • Annual income. Look for credit cards with minimum annual income requirements you can meet. 
  • Annual fees. If high fees are a concern for you, opt for a card with a low or $0 annual fee. 
  • Interest rate. Make sure you won’t have any nasty surprises on your credit card bill. Compare cards with a low interest rates to minimise risk.

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

Should I get a credit card?

Once you've compared credit card interest rates and deals and found the right card for you, the actual process of getting a credit card is quite straightforward. You can apply for a credit card online, over the phone or in person at a bank branch. 

Which credit card has the highest annual percentage rate?

The credit card market changes all the time, so the credit card with the highest annual percentage rate is also liable to change.

Keep in mind that credit card interest rates are expressed as a yearly rate, or annual percentage rate (APR). A low APR is generally good but also consider:

  • There can be different APR's for each feature of the card (e.g. purchases may have an APR of 14 per cent, while cash advances on same card could have an APR of 17 per cent.
  • Credit cards with a variable rate can change throughout the year, affecting your APR, so check the full details.
  • If you pay your balance in full every month, having the lowest APR is not as important as the other fees associated with the card. However, if you carry a balance from month to month, then you want the lowest APR possible.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How do you use a credit card?

Credit cards are a quick and convenient way to pay for items in store, online or over the phone. You can use a credit card as a cashless way to pay for goods or services, both locally and overseas. You can also use a credit card to make a cash advance, which gives you the flexibility to withdraw cash from your credit card account. Because a credit card uses the bank’s funds instead of your own, you will be charged interest on the money you spend – unless you pay off the entire debt within the interest-free period. If you pay the minimum monthly repayment, you will be charged interest. There are many different credit card options on the market, all offering different interest rates and reward options.

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

How easy is it to get a credit card?

For most Australians, there are no great barriers to applying for and getting approved for a credit card. Here are some points that a lender will consider when assessing your credit card application.

Credit score: A bad credit score is not the be all and end all of your application, but it may stop you being approved for a higher credit limit. If your credit score is less than perfect, apply for the credit limit that you need, rather than the one you want.

Annual income: Most credit cards have minimum annual income requirements. Make sure you’re applying for a card where you meet the minimum.

Age & residency: You need to be at least 18 years old to apply for a credit card in Australia, and most require that you are an Australian citizen or permanent resident. However, there are some credit cards available to temporary residents.

What should you do when you lose your credit card?

Losing your credit card is a serious situation, and could land you in financial trouble. Here is a simple guide detailing what to do when you lose your credit card.

Lock you card – Contact your provider and inform them about your lost credit card. From here lock, block or cancel your card.

Keep track of transactions – Look out for unauthorised credit card transactions. Most banks protect against fraudulent transactions.

Address recurring charges – If your card is linked to recurring charges (gym membership, rent, utilities), contact those businesses.

Check credit rate – To ensure you’re not the victim of identity theft, check your credit rating a month or two after you lose your credit card.

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How do you cancel a credit card?

It’s important to cancel your old cards to avoid any additional fees. Unless you’re doing a balance transfer, you’ll need to pay the outstanding balance before you cancel your credit card. If you’ve opted for a card with reward points, make sure you redeem or transfer the points before you close your account. To avoid any bounced payments and save yourself an admin headache, redirect all your direct debits to a new card or account. Once you’ve done all the preparation, call your bank or credit card provider to get the cancellation underway. Once you receive a confirmation letter, destroy your card and make sure the numbers aren’t legible.