04 Sep 2015
"Any really useful comparison tool would have to be very comprehensive, in order to give the credit card consumer a full picture of the choices available to them."
Steve Worthington, Adjunct Professor at Swinburne University
Much attention has focussed on the “spread" between card interest rates and the benchmark Reserve Bank cash rate, as well as how quickly rates move when the RBA shifts.
While the 'evidence' on the gap is there for all to see, what is more debatable is what to do about it. One suggestion is to impose a 'cap' on the width of the spread between the cash rate and the maximum credit card interest rate that could be charged.
Thus no matter whether the RBA moved the cash rate up or down, credit card interest rates could not be more than X per cent higher than the cash rate. But the underlying assumption here is credit card holders' only concern is the interest rate they will be charged if they 'revolve' their debt to the card issuer, that is don't pay of the balance in full thus incurring charges.
The Head of Public Affairs for the Customer Owned Banking Association noted surveys show low awareness by consumers of their credit card interest rate and of which cards offer the lowest card rates.
Superficially there is already plenty of competition in the Australian credit card market with over 240 different cards on offer. And because a consumer's relationship with a card issuer can often be a 'stand-alone' relationship, there are fewer barriers to 'switching' providers than in the transaction account or even mortgage markets.
So is the answer to make consumers better informed about the diversity and range of offerings in the credit card market?
One suggestion made to the Inquiry is to develop a comparison tool which incorporates the real costs of credit cards to the consumer.
Certainly raised levels of financial literacy would be more than useful and there are also examples from other countries about what information could be included on the monthly statement to raise cardholder's awareness of both their rights and responsibilities.
According to a survey of 2,200 credit cards holders recently conducted by ME for submission to the inquiry:
For example, in the United Kingdom the monthly credit card statement clearly states 'If you make only the minimum payment each month, it will take you longer and cost you more to clear your balance'.
The statement also carries more detail about how and when interest is charged.
Furthermore each cardholder receives an annual credit card summary statement, which totals all transactions made; total interest incurred; total fees and charges incurred and these other fees and charges are also listed. But of course the devil is in the detail.
The Australian senate inquiry heard about the complexity of how balance transfers work in practice even when superficially attractive. That complexity illustrates why any really useful comparison tool would have to be very comprehensive, in order to give the credit card consumer a full picture of the choices available to them.
The Senate Inquiry also heard much about the challenges for lower income credit card customers in 'switching' cards when they may have a 'damaged' repayment history. Whilst this is undoubtedly a factor in the 'stickiness' of cardholder mobility, it is not confined to low income credit card customers.
With over 16 million credit cards on issue in Australia it is likely many consumers hold multiple cards.
We must accept that whilst there can be irresponsible lending, there can also be irresponsible borrowing. Card issuers could help themselves by pooling both negative and positive credit reporting of their card holders but there appears to some reluctance to achieving this comprehensive sharing of credit card data.
Making credit cards the sole culprit for consumer indebtedness would be a mistake. The vast majority of borrowing in Australia is for the purchase of property and recent research shows Australians lose more money per adult on gambling than every other developed country in the world.
Further misguided regulation in the credit card market might just force consumers into borrowing from pay-day loans operators or even into what has been described as the 'darker areas' of lending, such a 'loan sharks', who would require an even bigger 'bite' out of the borrowers assets!
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
04 Sep 2015
10 Feb 2015