By business reporter Gareth Hutchens - 10 June 2020
The Reserve Bank has cut the official cash rate from 4.75 per cent to 0.25 per cent since 2011
Australian banks have pocketed $6.3 billion from credit card customers by failing to pass on interest rate cuts over the last decade, new analysis shows.
· The Coles branded Coles Low Rate Mastercard has had the largest rate increase according to CHOICE data
· Second on the list is the ME frank credit card, followed by the Police Credit Union Extralite Credit Card
· In 2015, Commonwealth Treasury officials explained banks considered credit cards to be riskier than other loans given their unsecured nature, prompting a higher rate to be charged
Some of the better-known credit cards — often tied to rewards programs — have even increased their rates in recent years, undermining the Reserve Bank's efforts to relieve pressure on households.
Since 2011, the Reserve Bank has cut the official cash rate from 4.75 per cent to 0.25 per cent (an historic low for Australia), but some credit card customers have received the opposite treatment to mortgage holders — with some card rates climbing above a staggering 20 per cent.
"By failing to pass rate cuts on for credit cards, banks have effectively stolen $6.3 billion from the pockets of Australians," CHOICE chief executive Alan Kirkland said.
"Some banks — including ANZ, Bendigo, and St George — have even increased rates on credit cards. This is disappointing behaviour from an industry looking to restore trust after the scandals of the banking royal commission.
"For many people, lower credit costs would have saved them from falling into a debt spiral and facing years of unnecessary hardship.
"Banks have cut interest rates on mortgages as the cash rate has fallen. There's no justification for failing to do the same for other credit products, especially now so many Australians have lost their job," he said.
CHOICE, a consumer advocacy group, will on Wednesday launch a crowdfunding initiative to fund a national advertising campaign calling on Australia's banks to do better.
It calculated the $6.3 billion figure with help from Mozo, a company that tracks interest rates on credit cards.
Mozo took the average purchase rate charged on Australia's credit cards each month, from June 2011 to April 2020, and calculated how much the gap between the average rate and the RBA's cash rate changed each month.
Then, for each month, it multiplied that gap by the total interest accruing to balances on credit cards and added each monthly figure to arrive at a total.
It reveals the amount of money banks have made from credit card customers over the last decade by failing to pass on rate cuts.
CHOICE has also compiled a list of the 12 credit cards with the biggest rate increases in Australia since April 2016.
At the top of the list, with the largest rate increase, is the Coles-branded Coles Low Rate Mastercard.
Rates on low interest credit cards have not fallen in line with the RBA's official cash rate.(Supplied: Finder)
Its basic rate on card purchases has increased three percentage points, from 9.99 per cent to 12.99 per cent, between April 1, 2016 and May 19, 2020. The Coles card is backed by Citigroup.
Second on the list is the ME frank credit card.
Its basic rate has increased two percentage points, from 9.99 per cent to 11.99 per cent, since April 1, 2016. The card is owned by Members Equity Bank.
Third on the list is the Police Credit Union Extralite Credit Card.
Its basic rate has increased two percentage points, from 11.99 per cent to 13.99 per cent, since April 1, 2016. It is owned by Police Credit Union.
The basic rate on the ANZ Rewards card, the ANZ Rewards Black card, and the ANZ Rewards Platinum card, have all increased by 1.45 percentage points, from 18.79 per cent to 20.24 per cent.
The basic rate on Bendigo Bank's Platinum card has increased by one percentage point, from 18.99 per cent to 19.99 per cent.
Credit card market dominated by major banks
In 2015, Commonwealth Treasury officials prepared a ministerial brief to the federal treasurer explaining why credit card interest rates had been "unresponsive" to falling bank funding costs in recent years.
It said Australia's credit card market offered over 100 credit card brands but — just like the mortgage lending market — the major banks controlled around 80 per cent of the market.
It said the effective "spread" earned by credit card issuers had increased sharply during the global financial crisis, reflecting a general repricing of credit risk on unsecured lending that had occurred in a number of advanced economies, and the spreads remained high post-global financial crisis and even increased a little.
Standard Credit Card Purchase Interest Rates have not fallen, even though the RBA cash rate has plunged.(Supplied: Finder)
"The average credit card rate followed the cash rate from 1990 to 2010. Every time the cash rate went up or down, so did the credit card rate, but that all went out the door from 2010 onwards," observed Finder insights manager Graham Cooke.
"If the banks had passed on the rate cuts as they did up to 2010, that would make the average standard rate today just 12.9 per cent, it currently stands at 19.94 per cent.
"The reality is that at the high end of the credit card market, customers don't care about the interest rate. They are in it for the points, and that's what this data proves."
Treasury explained this growing gap by saying banks considered credit cards to be riskier products than home loans or car loans, because they are a form of "unsecured" lending — meaning the loan isn't secured against any asset.
Therefore, a higher rate is charged on credit cards to reflect the risk of that unsecured debt.
It also said the pricing model for credit cards was based on a form of cross-subsidisation.
Customers who pay their credit cards in full each month do not pay interest, so the banks lose money on the credit extended to them (and the costs associated with rewards systems like frequent flyers).
To make up for that, banks charge a higher interest rate on the balances of customers who cannot afford to repay their debt each month.
Last year, ANZ chief executive Shayne Elliott told radio 3AW that credit cards were one of the bank's most profitable businesses, but data did not exist showing exactly how much profit was generated by credit cards.
"It's a fair product, people know what they're getting. It's easy not to use it if you don't want one," he said.
The Australian Banking Association also said consumers could find a better deal if they were unhappy with their current rate.
"A quick search on Mozo and Choice's very own websites shows that Australian banks are fiercely competitive when it comes to credit cards, offering a wide range of products with some with interest rates as low as 10 per cent and no annual fee," an ABA spokesperson said.