2.1 This chapter provides an overview of the Australian credit card market. It

begins with a brief summary of the importance credit cards have in the Australian

payments system and sets out key data in relation to the value of credit card

transactions and outstanding balances. In turn, this chapter explains the critical

distinction between cardholders who pay off their balance in full each month and

thereby avoid paying credit card interest ('transactors'), and cardholders who carry part

of their balance over at the end of the statement period and therefore incur interest charges ('revolvers').

2.2 This chapter further provides information on the number and type of credit

card providers in Australia, along with an explanation of the current situation and

trends with respect to credit card interest rates and their relationship to the RBA cash

rate. Comparisons are also provided between credit card interest rates in Australia and overseas.

2.3 This chapter also summarises the responsible lending obligations that apply to credit card lending.

2.4 In recent decades, credit cards have grown to become a critical component of

the Australian payments system. There are currently around 16 million credit cards on

issue in Australia, and approximately 40 per cent of Australian adults have at least one

available to Australian consumers: according to CANSTAR data cited by Westpac, as

2.5 Credit cards and debit cards account for approximately two-thirds of non-cash

transactions in Australia (although only about 3 per cent of the value of total

transactions, with high-value non-cash transactions typically using payment methods

such as electronic funds transfer). In 2014–15, Australians made 2.2 billion credit card

payments, with a total value of $285 billion. According to the RBA, in the June

quarter of 2015 new credit card transactions averaged around $24 billion per month.

At the end of June 2015, the total quantum of outstanding credit card debt was

2.6 Credit cards comprise a small and (as discussed further below) declining

proportion of total household borrowings, at about 2 per cent according to the

Australian Bankers' Association (ABA), or a little under 3 per cent according to the

of credit cards in household finances because they are a revolving credit facility with

In this sense, credit cards provide revolving credit facilities which can play an

2.7 Credit cards also play a significant role for Australian merchants. In its

submission, the Australian Retailers Association outlined some of the benefits credit

cards provide to merchants:

[Credit cards] have reduced the risk for merchants having to keep large

amounts of money on the premises and made the point of sale experience

faster and easier. Before credit cards, many retailers held accounts for

customers (where they could take their goods and pay for them at a later

date) for several weeks, thus accepting and carrying the risk of not being

paid for the duration—and in some cases, not being paid at all. With the use

2.8 Typically, interest on credit card debt is only applied if a cardholder does not

pay their balance in full at the end of the one-month statement period. As cardholders

generally have about 14 to 25 days to pay their monthly balance, this means there is

usually an interest fee period of up to 44 to 55 days, or thereabouts. If a balance from

a statement period is not paid off in full, then interest will be applied to the

outstanding balance, and any transactions made since the end of the statement period

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,

Submission 20, p. 16.

2.10 The RBA observed that the proportion of credit card debt balances accruing

interest has fallen from around 75 per cent to 65 per cent since 2012. Balances

accruing interest have also fallen in absolute terms since peaking in late 2011 (as

shown in Figure 1). The RBA suggested the decline 'possibly reflects a range of

factors such as changes in consumers' financial behaviour, government reforms that

took effect in 2012 relating to repayments and limit increase arrangements, and

CBA suggested the trend might be attributed to 'higher customer repayment rates and

2.11 Credit card debt has also declined as a proportion of overall household debt in

the past decade, from about 4.5 per cent in 2001 to a little below 3 per cent now. It is

important to note that while the ratio of household debt to income has remained

relatively stable over this period, the ratio of credit card debt to household debt has

declined. The RBA observed that this trend might reflect the increasing availability

and use of mortgage offset and redraw facilities (mortgage interest rates being lower

2.12 While the use of credit cards grew strongly through the 1990s and early

2000s, since 2004–05 spending on debit cards has grown more strongly than on credit

…is likely mostly a reflection of broader macroeconomic trends, as the

period to the mid-2000s was one where the ratio of household debt

(especially for housing) to income grew significantly and where the

household saving rate was falling. By contrast, the period since the mid-

2000s has seen a broad stabilisation in the household debt ratio, a recovery

2.13 The ABA pointed to similar trends in how Australians were using their credit

cards. It noted that while the overall value of credit card transactions is currently

growing at around 4 to 5 per cent a year, over the past decade repayments on credit

cards, excluding interest, have exceeded new transactions:

Over the year ending May 2015, repayments exceeded the value of

transactions by $8 billion; the value of transactions on credit cards was

2.14 Whereas the RBA referred to recent declines in the amount of credit card debt

accruing interest and the proportion of credit card debt to overall household debt, a

joint submission from the Financial Rights Legal Centre and Consumer Action Law

Centre highlighted higher levels of credit card indebtedness in the past decade:

Australian credit card debt is continuing to grow rapidly, in line with a huge

growth in household debt. The majority of Australian households now have

a net credit card debt. Statistics released by the Reserve Bank of Australia

show that as at May 2015 there were 16 million credit cards with

outstanding balances of $51.2 billion. Almost 64% of outstanding balances,

or $32.6 billion, was accruing interest. This represents an incredible 47.3%

increase in balances accruing interest over the past 10 years. These statistics

correspond with the huge increase in household debt. Since March 1977,

we have seen the percentage of household debt to disposable income

2.15 Industry and regulatory analysts commonly categorise cardholders as

'revolvers' and 'transactors'. Revolvers typically pay interest on their balances (as they

carry forward, or 'revolve', card balances over time), whereas transactors typically pay

off their balance in full and thereby avoid paying interest on their balances. According

to the RBA, revolvers are more likely to hold lower-rate cards than transactors, and

2.16 The RBA advised that the proportion of revolvers is higher among low income

households and when high-income households do fall into the revolver

2.17 Drawing on data from the household, income and labour dynamics survey in

Australia (HILDA), Treasury also noted that low-income households have more credit

card debt relative to their incomes and pay more in credit card interest relative to their

incomes than high-income households (although higher income households pay more

interest in absolute terms). HILDA data similarly shows that low net worth

the data in its submission, Treasury advised that low income households:

…would be more likely to be paying the high interest rates charged on

credit cards and be more likely to be subject to high additional fees and

charges. In particular, they will be more affected by the practice of

backdating interest charges when cardholders fail to pay off their full

2.18 The committee also received evidence suggesting that people on low incomes,

including many disadvantaged and vulnerable people, are more likely to use credit

advances are not eligible for any interest free period and typically attract an even

higher rate of interest than the ongoing purchase rate on a credit card.

cardholders participating in the survey typically pay off their account in full within the

interest free period, implying that 27 per cent typically do not. Industry estimates

suggest the proportion of cardholders who typically pay interest is slightly higher, at

between 30 and 40 per cent. The RBA ventured that the gap between its survey results

and industry data may reflect hoped-for, rather than actual behaviour on the part of consumers.22

2.20 A similar point was made in a joint submission by the Consumer Action Law

Centre and Financial Rights Legal Centre. They referred to a recent ANZ financial

literacy survey which found that 65 per cent of cardholders claimed they had always

paid their main card balance in full over the last 12 months:

However, the proportion of credit card balances accruing interest indicates

this figure is overly optimistic. A significant number of consumers are

actually 'revolvers': consumers who pay minimum monthly repayments or a

fraction of the outstanding balance and incur high interest rate charges—

around two thirds of outstanding balances actually attract interest. This

tendency towards identifying oneself as a transactor, when in fact you are a

revolver, is a basic behavioural bias. Consumers tend to underestimate or

are blind to factors that can impede repayment of their credit card balances.

People are overly optimistic and have other biases in assessing risk,

2.21 As noted above, there are currently over 80 institutions offering more than

250 credit card products in Australia. CANSTAR data provided to the committee by

Westpac showed that of the 83 institutions offering credit cards in July 2015, 30 were

obscures the fact that the Australian credit card market is dominated by banks, and in

particular the four 'majors' (the CBA, Westpac, ANZ and NAB, and their

subsidiaries). The ABA informed the committee that banks provide approximately

88 per cent of credit cards on issue in Australia, and account for approximately 81 per

2.22 As Treasury noted, while the four major banks' share of the credit card market

is high, this reflects the 'concentration of the Australian banking system more

ABA cites CANSTAR data from June 2015 showing at least 67 providers (32 banks, and 35

other institutions) offering at least 193 credit card products. Australian Bankers' Association,

Submission 15, p. 6. The change is perhaps indicative of both the fluidity of the market and the

difficulty in precisely measuring the number of providers and products available at any point in time.

noted that the majors' 68 per cent share of balances outstanding has fallen slightly

over the past decade (from around 74 per cent in 2004, although it has increased from

about 66 per cent immediately prior to the GFC) and is lower than the major banks'

2.23 It is also important to state that neither Visa nor MasterCard, the two most

widely used credit card brands, actually issue any credit cards themselves. Rather,

they are both operators of payment networks that are utilised by banks and other

providers of credit cards. As such, Visa and MasterCard do not have any role in

determining credit card interest rates (or indeed any other aspect of credit card

2.24 The persistence of high interest rates in the credit card market, despite a

falling RBA cash rate, has been an important focus of this inquiry. While the issue is

explored in detail in chapter three, some general contextual information regarding

credit card interest rates is offered below.

2.25 Interest charged on credit cards varies widely depending on the type of card

and provider. According to an August 2015 search of comparison website Mozo, there

is a 15.5 per cent gap between the lowest rate card, a Quay Credit Union Visa Credit

Card with an ongoing purchase rate of 7.99 per cent, and the highest rate card, a

2.26 While there are a range of credit cards available offering a variety of rate

features and pricing structures, cards on issue can be broadly categorised as either

'low-rate', 'low-fee' or 'rewards'. With respect to interest rates, the RBA maintains and

publishes two data series: one on 'standard' cards, a category that most reward and

many low-fee cards fall into, and which commenced in January 1990; and the other on

submission that while there is a wide variation in the advertised interest rates for credit

30 November 2015.

cards, standard cards currently tend to bunch around the 20 per cent mark, while

2.27 As Treasury confirmed in its submission, while the RBA cash rate has

declined by 2.75 percentage points since late 2011, credit card interest rates have

consumer advocacy group CHOICE, if credit card rates had moved at the same rate as

the cash rate over that period, Australian credit card holders would have paid

2.28 A document tabled by CANSTAR also shows that the gap between credit card

interest rates and the RBA cash rate has grown considerably since 2007, although the

gap has grown rather more slowly in the post-GFC environment. CANSTAR's

document tracked the gap since 2007 between the official cash rate and three other

measures of credit card interest rates: the average purchase rate, the minimum

purchase rate, and the maximum purchase rate. The gap between the cash rate and

each of these three measures has, according to CANSTAR's document, grown since

2007 (see Figure 3). As CANSTAR explained, whereas the gap between the average

credit card purchase rate and the cash rate was 8 per cent in 2007, it currently stands at

35 Mr Stephen Henry Mickenbecker, Group Executive, Ratings and Financial Services,

Source: Documents tabled by CANSTAR at a public hearing held in Canberra on 22 September 2015.

2.29 The growth in the gap between the cash rate and headline credit card interest

rates appears even more pronounced when annual fees are added to the interest rate.

Mr Ross Greenwood, the Nine Network's Business and Finance Editor, tabled a

document that annualised average fees into average credit card rates from a range of

providers to a card with a $5000 balance. Using this approach, Mr Greenwood

assessed the gap between the adjusted interest rate (the interest rate with the annual

fee annualised into it) and the RBA cash rate. Mr Greenwood found that for cards

provided by the major banks the gap had in effect blown out to between around 17 and

20 per cent (and higher still for Amex and Citibank). This compared, according to

Mr Greenwood's analysis, to a gap for the same banks' card offerings that, using the

2.30 It should be noted that average advertised interest rates do not fully reflect

trends in interest actually paid by cardholders, at least in aggregate terms. Advertised

36 Document tabled by Mr Ross Greenwood, Channel 9, at a public hearing held in Sydney on

27 August 2015. For Mr Greenwood's explanation of his analysis, see Mr Ross Greenwood,

rates do not, for instance, capture the effect of interest free periods or low or zerointerest

balance transfer offers. According to the RBA, the effective interest rate

received by the major banks on their entire credit card portfolios—actual interest

earned as a proportion of balances outstanding—has fallen about 2 per cent since mid-

began in late 2011, the cash rate has fallen from 4.75 per cent to 2 per cent, suggesting

that it has fallen a little more than effective interest rates on credit cards over the same

period, but not dramatically so.

gap between effective interest rates and the weighted average of the interest rates paid

on banks' sources of funds, as opposed to the gap between effective interest rates and

the RBA cash rate. While funding costs have moved roughly in line with the RBA

cash rate since the current easing cycle began, Treasury pointed out that funding costs

'have risen relative to the target cash rate since the financial crisis as banks switched to

comparison of funding costs and effective credit card interest rates since 2007 for the

major banks (see Figure 4).

2.32 The abovementioned average effective interest rate of 11.6 per cent takes

account of the banks' entire book of credit card loans, including debt that does not

around 17 per cent, which is down about 1 per cent since 2011 (see Figure 4). The RBA concluded:

Taken together, the recent changes in these two series [for the effective rate

for credit card balances accruing interest, and the average rate on entire card

portfolios] are consistent with the observed decline in the proportion of the

stock of debt that is accruing interest (either reflecting more consumers

paying down debt ahead of being charged interest, or reflecting an increase

in the take up of zero and lower-rate balance transfers) and also some

38 The World Bank defines 'interest rate spread' as the 'interest rate charge by banks on loans to

private sector customers minus the interest rate paid by commercial or similar banks for

accessed 30 November 2015.

2.33 Even if effective interest rates have trended down over the current easing

cycle, it is apparent that the spread between bank funding costs and effective interest

rates has grown significantly since the GFC. In the years prior to the GFC, the spread

was on average 6.7 per cent, and did not vary much from this mark; since the GFC,

the spread has been on average 8.7 per cent, and again that spread has not varied

greatly in the post-GFC period (see Figure 5).

2.34 In its submission, the RBA provided an even more differentiated and detailed

picture of trends in interest spreads to funding costs. It showed that while the spread

between funding costs and effective credit card interest rates on balances outstanding

is currently about 9 per cent, the spread for cardholders paying interest is about

14.75 per cent (see Figure 6).

2.35 The reasons for the apparent decline in the effective interest rate on credit

card portfolios, and trends in the spread between the cash rate and credit card interest

rates (both headline and effective), are explored in chapter three.

2.36 It is important to emphasise at this point that funding costs are only one

component of credit card costs. Indeed, as discussed in the next chapter, the major

banks advised the committee that funding costs constituted less than 25 per cent of the

cost base of providing credit cards. Other costs, they noted, include but are not limited

to credit management and costs associated with fraud and fraud protection, rewards

and product benefits, insurances and concierge services, technology and systems

costs, and innovation and product development. Card providers also stressed that

credit card lending has a higher risk profile than secured forms of lending, and this

higher risk is priced into credit cards. The relative importance of these various costs in

informing credit card interest rates is considered in chapter three.

2.37 Several witnesses told the committee that trends in interest rate settings on

Australian credit cards were not dissimilar to trends in comparable markets overseas.

For example, the ABA argued that comparisons with the United States and United

Kingdom 'suggest the dynamics for interest rates on credit cards in Australia are not

cards are not uncommon overseas, and that it was likely 'some of the same forces are

2.38 The CBA also told the committee that the spread between the cash rate and

credit card interest rates was not unusual by international standards. It further

suggested that card providers internationally, like the CBA, also accounted for

economic risk in pricing their products:

If you look at international experience, in the UK you will find credit card

rates ranging from about seven to 30 per cent and in the US probably in the

range of 11 to 30 per cent, despite their cash rates being effectively at zero.

That supports the fact that credit card providers, not just domestically but

internationally, are very cognisant of pricing for risk. Those markets have

demonstrated that losses can be substantial in any given year, and our role

2.39 However, Professor Abbas Valadkhani claimed that the gap between the cash

rate and credit card rates was substantially wider in Australia than in the United States

and United Kingdom. He asserted that if credit card spreads in Australia were like

those in the United States, Australians would be somewhere in the order of

$840 million better off; and if spreads were the same as those in the UK market,

out responsible lending obligations which apply to all forms of regulated credit,

2.41 The responsible lending obligations require credit licensees to do certain

things before providing a credit card to a consumer or increasing a cardholder's credit

limit. As ASIC explained, these processes include making reasonable inquiries about a

consumer's requirements and financial situation, taking reasonable steps to verify the

Committee Hansard, 27 August 2015, p. 15.

43 Mr Matthew Comyn, Group Executive, Retail Banking Services, Commonwealth Bank of

44 Professor Abbas Valadkhani, Department of Accounting, Economics and Law, Swinburne

introduction of the responsible lending obligations on 1 July 2010, consumer credit was

primarily regulated by the states and territories.

consumer's financial situation, and making an assessment as to whether a credit

2.42 As ASIC noted, its primary guidance on responsible lending, including in

Responsible lending conduct (RG 209). RG 209 also provides guidance to credit

2.43 ASIC also administers obligations that are specific to credit cards and were

and Credit Cards) Act 2011 and associated regulations. These obligations are as

follows:

applicants, setting out how minimum repayments are calculated, interest rates

that apply, and interest-free periods and fees;

when a cardholder exceeds their credit limit;

those portions of a balance to which the highest interest rate applies (this

applies to cards issued after 1 July 2012); and

statements, highlighting the length of time it would take a cardholder to repay

2.44 The foregoing discussion about statistical trends in credit card interest rates

should not obscure the very real and troubling effects that high credit card interest

rates can have on individuals, families and communities. The committee received a

large amount of evidence on these effects which has played an important role in

informing the committee's thinking about credit card interest rates and the credit card

market more generally.

2.45 The Consumer Action Law Centre and Financial Rights Legal Centre

observed that credit card debt can have 'serious and profound impacts':

For those with the most acute problems with credit card debt, the debt

seriously harms their lives. It can cause, amongst other things, family

breakdown, violence, crime and deterioration in health (including mental

health). Significant credit card indebtedness can also have a long-term

2.46 The St Vincent de Paul Society advised the committee that it worked with

people every day who in their struggles to manage out-of-control credit card debts had resorted to:

…borrowing money, selling items of value, taking out short-term pay day

loans, and seeking the assistance of welfare services in addition to

2.47 A number of organisations relayed personal stories of hardship resulting from

high-interest credit card debt. Good Shepherd Australia New Zealand told how one of

their clients had not only been a victim of domestic violence but also financial abuse,

Legal Service referred to a number of cases it had dealt with where, as a result of

mental illness, family breakdown or other crises, a vulnerable individual had amassed

Australia (FCA) provided a number of examples which showed that people of all ages

and from all walks of life could become trapped by credit card debt. For example,

FCA told how a woman in her 30s had accrued a long-term credit card debt and now

felt 'trapped, and unable to move forward with any financial plans until she had repaid

this debt'. The FCA also explained how a 75 year old pensioner had used his credit

card to supplement his income and avoid homelessness, but in the process had built a

2.48 Chapter five provides a detailed analysis of the problem of long-term credit

card debt, and sets out some options for helping people avoid the credit card debt trap

and, when that fails, better assisting people experiencing financial hardship. In

addition, reference is made throughout this report to how the credit card market is

currently failing vulnerable and disadvantaged Australians. In part, this story is told in

statistics and headline figures, including those set out earlier in this chapter. However,

it needs to be emphasised that the committee's concern in this regard has been largely

informed by the compelling and troubling evidence it received of individuals and

families struggling under the weight of high-interest credit card debt.