After yet another 'why haven't credit card rates come down' article in the news, we explain why credit card rates remain high, even after RBA cuts.
I'm not a big fan of The Advertiser. In my opinion, it sits somewhere between Today Tonight and The Messenger on the scale of journalistic softness. On a day where hundreds die in a foreign conflict, you can count on The Advertiser to cover the big issues: wonder diets and results from studies which conclude the obvious (today's was the revelation that women are attracted to men with a secure job and a good income - research grant well spent).
So I wasn't surprised to read their latest 'Banks are bad and will rip you off because this is The Advertiser' article, headlined 'Credit card rates rise as interest falls' (I think the interest they're referring to is the RBA cash rate and, sadly, not the general public's interest in populist journalism).
Clearly versed in economics, the reporter equated credit card rates to the Reserve Bank cash rate and suggested banks were profiteering from customers by not 'passing on' rate cuts.
I can see the shallow economic logic. Banks are in trouble for not passing on RBA cuts to home loans. Credit cards also have interest rates. Therefore, banks are bad.
The reporter even trotted out the customary angry-consumer-advocate, who lambasted the banks for 'exploiting customers'.
The article didn't include a quote from a bank spokesperson (to hell with right-of-reply), but a source from the independent banking authority Cannex tried to explain (quite reasonably in my opinion) that the RBA cash rate isn't as strongly correlated to credit card rates as it is to mortgage rates.
As we reported in our article '
Why Credit Card Rates Haven't Dropped' earlier this year, the global economy is still a little apprehensive about risky debt and that makes funding for credit card lending difficult to obtain.
The default risk is much higher on a credit card and items purchased with a credit card are rarely redeemable assets. When you take out a mortgage, you have the house as security and the bank can repossess and sell it to recuperate their costs. No such security with a credit card.
So it looks like credit card rates will remain high until the global financial markets become more confident in high-risk lending. When there's more supply of funding, the costs will decrease and competition in the Australian credit card market will force down interest rates.
