Transactors and Revolvers

Transactors

Credit card Transactors make only a very small contribution to the revenues earned by credit card issuers (Table 5). Transactors pay, at most, an annual fee to hold a credit card but receive interest-free credit and may be eligible for loyalty points which accrue in proportion to the value spent on their credit card. Around one quarter of credit card balances outstanding do not attract interest. Based on information provided to the Joint Study by card scheme members, revenues received from transactors from annual fees fall short of the cost of providing the interest-free period and loyalty points by around $90 million a year. That is, Transactors are subsidised by this amount each year.

The below extract from RBA's Consultation Document titled Executive Summary - Reform of Credit Card Schemes in Australia: RBA's "A Consultation Document" – Dec 2001 notes -

* under point 6 of 'Introduction' that some Credit Cardholders enjoy the convenience of their Revolving Line/s of Credit without materially contributing to Credit Card Issuers' operating costs:

"Within the latter group, there is a third group which directly contributes very little to the costs of credit card schemes – these are the cardholders (known as Transactors) who settle their credit card account in full each month. Although they normally pay an annual fee, they pay no transactions fees, enjoy the benefit of an interest-free period and in many cases earn loyalty points for each transaction."

* on page 15:

"The other two-thirds of total issuing revenues is generated by cardholders who make use of the revolving line of credit (“revolvers”), that is, who do not pay off their accounts by the end of the interest-free period. Preliminary data from the Reserve Bank’s new payments system collection indicate that about three-quarters of credit card outstandings are interest-bearing. Credit cardholders who use the credit card purely as a payment instrument (“transactors”), that is, who pay off their balance by the end of the interest-free period, make only a very small contribution to total issuing revenues, mainly through annual fees."

Many Transactors are Convenient Free Riders that enjoy considerable convenience of 'swiping their plastic' (reliant upon costly electronic infrastructure of the Four Party Schemes and Three-Party Schemes) to make hundreds of Purchases each year, and not pay for their Purchases for up to 55 days. The majority of Transactors make Purchases that aggregate to over $20,000 pa. Many receive over $100 per year in Reward Programme Points - income tax and FBT free. Some claim their Annual Cardholder Fee as a tax deduction.

The American ExpressPlatinum Business Card has an Annual Fee of $1,500 (tax deductible) and provides copious untaxed personal income. It "..... would cease to exist if and when the ATO required recipients of the flyer-point income-in-kind to declare it as income and pay tax on it."

Revolvers

Financially Uneducated And Vulnerable Australians notes that approx. 20% of Credit Cardholders, which include Persistent Revolvers and some Occasional Revolvers, in Australia who are over 18 years of age and -

1. Lack Financial Acumen due to possessing low Financial Literacy Capacity; and/or

2. suffer from Compulsive Buying Disorder,

who have paid Interest And Penalty Fees Revenue on Credit Cards and are classified by the below mentioned Productivity Commission Staff Working Paper as 'level 1' or 'level 2' Financial Literacy Australians

The Senate - Economics References Committee's submission "Interest rates and informed choice in the Australian credit card market" - December 2015 notes:

"2.9 While the RBA advised that about 75 to 80 per cent of credit card transactions do not accrue interest, about 65 per cent of the total quantum of credit card debt (or, as noted above, $33.1 billion) is accruing interest. To clarify, interest paying cardholders 'account for about 30–40 per cent of accounts, about 20–25 per cent of transactions, but close to two-thirds of the outstanding stock of debt'.9

Below are two an extracts from RBA Submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates - Aug 2015:

"Seventy-three per cent of credit card holders participating in the survey reported that they typically paid off their account in full by the due date each month (within the interest-free period). While this implies that only 27 per cent of cardholders pay interest charges, some industry estimates suggest that a slightly higher proportion (between 30 and 40 per cent) of cardholders pay interest; it is possible that survey responses reflect hoped-for rather than actual behaviour. Subject to this caveat, the survey suggests that the proportion of Revolvers is somewhat higher for lower-income households than higher-income ones (Graph 7)."

		Occasional Revolvers	Persistent Revolvers	ORs	PRs	Agg.	% of PRs
1st (lowest) Household income quartile		45%	55%	34	42	76	55.3%
2nd (second lowest) Household income quartile		55%	43%	46	35	81	43.2%
3rd (second highest) Household income quartile		66%	33%	44	22	66	33.3%
4th (highest) Household income quartile		80%	20%	46.5	11.5	58	19.8%
		246%	152%
	251%	61.87%	Occasional Revolvers
	149%	38.13%	Persistent Revolvers
	400%	100.00%

Casual empiricism of the above (Graph 7) as calculated in the immediately above table suggests that approx. -

* almost two thirds of Revolvers, referred to by the RBA as Occasional Revolvers, pay interest occasionally.

* over one third of Revolvers, referred to by the RBA as Persistent Revolvers, pay 17% Interest (average) on 100% of their Credit Card Debt.

Improving consumer outcomes and enhancing competition - Aust Govt - May 2016

"According to the Australian Bankers’ Association, around 20 per cent of credit card accounts in 2014 — over 3 million accounts — had outstanding balances of over $7,500. Around 6 per cent of accounts had balances of over $15,000.[2] Not all of these balances will be incurring interest. However, the Reserve Bank of Australia estimates that 30 to 40 per cent of credit card accounts incur interest and that credit card users who incur interest charges have larger balances than users who do not pay interest.[1]

[1] As at February 2016, there were around $52 billion of balances across 16 million credit card accounts. Of these balances, $33 billion are incurring interest. Given that around 35 per cent of accounts are typically not paid in full, this suggests that the average balance on an account incurring interest is $5,800, while the average balance on an account not incurring interest is $1,800.