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The $842 million credit card rort

The $842 million credit card rort

Australians with credit cards have been slugged $842 million in extra interest since October 2011 as most card providers fail to pass on Reserve Bank-led rate cuts, research shows.

While the Reserve Bank of Australia (RBA) has slashed the cash rate by 1.75 percentage points since November 2011, Australian credit card rates have remained largely unchanged.

RateCity research shows that the average credit card interest rate in October 2011 was 17.28 percent. It’s now 17.21 percent – almost six times the RBA’s official cash rate.

Michelle Hutchison, spokeswoman for RateCity, said in all the debate about home loan rates, the question of credit card rates often gets overlooked.

“For the average Australian with the average outstanding credit card balance accruing interest of $2359, they’ve paid an extra $55 interest in the past 16 months as a result of providers not passing on cuts,” she said.

“That might not sound like much, but it’s worth over $842 million across all credit cards.”

Institutions claim that credit cards aren’t like other lending products; that they’re not driven by changes in RBA interest rates, she said. Yet, when the RBA lifted the cash rate by 0.25 percentage points in November 2010 providers of nearly half of the credit cards in RateCity’s database had passed on this increase in full within three weeks.

“Consumers have a right to be confused – and even a little cranky – when institutions don’t move rates down in line with the RBA, but do move them up in line with cash rate movements.”

Given the trend, cardholders could be forgiven for thinking that there is nothing that they can do, but all of us can take some responsibility, said Hutchison.

“Right now credit card rates range from 9.5 percent to 22.99 percent, and there are 94 cards in RateCity’s database with rates below the average rate of 17.21 percent – in other words, there’s no shortage of alternatives if you want a card with a lower rate,” she said.

Paying the minimum payment each month isn’t enough, she added. 

“Credit card debt is just as much of a debt as a mortgage and it can be a lot more expensive. So the simplest way to avoid paying lots of interest is to use your interest-free period and pay your card off in full,” she said.

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Learn more about credit cards

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. 

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.

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.

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.