Should Credit Card Rates Be Tied To The Cash Rate?

Checked out the credit card market lately? As you compare credit cards, it’s easy to get swept up in the promise of enticing extras and bulging bonus points offers. But, one thing you may overlook as you speculate idly over the exotic locations you could visit using that massive chunk of bonus points is how much you will pay in interest if you happen to carry a balance on the card.

Credit cards are a business. And as such, they’re all about the big sell. They draw you in with those appealing extras and extravagant offers, all the while downplaying how much the card costs in fees and interest. Yes, that info is there, but it’s definitely not the headline act. Unless of course, the card is selling itself on its low cost status.

Don’t get us wrong, there is absolutely nothing wrong with choosing a card with all the trimmings. If you get value from what’s on offer – as in, you get more back than you put in – and you have funds in the budget to cover annual fees that run to hundreds of dollars, then play away. As long as you avoid interest by clearing your balance each month, all should be well.

But, what if you don’t? What if you can’t pay off your balance and have to carry it over? With the purchase rate on many high end cards topping out at 22% or 23% p.a., the interest you pay will start to stack up pretty quickly indeed. Which not only makes it harder to pay down your balance the following month, it also reduces the value of all those lovely extras.

And it’s not just expensive, high end cards that charge these higher rates. There are plenty of ‘low cost’ cards with no annual fee that apply rates upwards of 20% p.a., while providing only a basic range of extras. With these high rates being seen throughout the market, many are now calling for change, with one man in particular putting the credit card industry on notice.

Calls for Change

That man is Victorian Treasurer Tim Pallas.

Earlier last week, Mr Pallas called on the federal government to tie credit card interest rates to the official cash rate, describing the current situation as “unconscionable”. Writing to his federal counterpart, Treasurer Josh Frydenberg, Mr Pallas also approached the heads of Australia’s major banks, asking them to review the interest rates on their credit cards.

Saying banks had profited from disproportionately high interest rates while consumers struggled through tough economic times, Mr Pallas stated, “This is unreasonable, it’s unfair, it’s unconscionable and the banks really do need to amend their behaviour”.

Last Tuesday, the Reserve Bank of Australia announced its decision to hold the record low interest rate of 0.10%. How do rates on credit cards compare? According to research carried out by consumer advocacy group CHOICE, 12 credit card companies were shown to be charging higher rates during economically beleaguered 2020 than in 2017, with some charging more than 20% p.a.

Meanwhile, homeowners don’t have to look far to find home loans fixed below 2% p.a. CHOICE campaigns director Erin Turner said rates in the credit card market are too high and don’t reflect banks’ lending costs. “It looks like it’s a pure gouging of consumers and a really broken market,” she said. “Credit card interest rates have been too high for too long.” (1)

So, is there a maximum amount providers can charge in interest on credit cards? Yes. Current rules in place cap the maximum interest rate at 48% p.a.

Responding to the concept of this cap, Mr Pallas said, “In the current interest rate environment, those sort of protections are woefully inadequate”.

“Our banking leaders and the federal government must act to ensure consumers are not exposed to an unreasonable or unfair financial burden from high credit card rates,” he continued. “We know that banks have benefited from excessive interest rates for far too long, and it’s time that they do the right thing and start earning back the public’s respect.”

And the Response?

While Mr Frydenberg seemed to be unavailable for comment on the matter, other parties have weighed in since Mr Pallas sent out his calls for action over the Easter weekend.

According to the Finance Sector Union’s Nicole McPherson, the credit card market is “open slather”, meaning it seems to be free to act as it likes – to the unfortunate detriment of the cardholder.

“Finance Sector Union members are experiencing an increased focus by banks on selling these high-margin products,” she said. “This can lead to a tragic cycle of spiralling debt for the customer, and stress and pressure on Finance Sector Union members to sell.” (2)

This opinion was backed up by Financial Counselling Australia chief executive Fiona Guthrie. “For people who are renting and don’t have other assets, this [credit card debt] could be their major debt – and when those interest rates are so high, it just makes it really hard for people to ever see a way out,” she said.

Calling on the Australian Competition and Consumer Commission (ACCC) to investigate how banks determine the rates on their credit cards, Ms Guthrie said, “There is something really strange happening when the cash rate is so low and credit card rates are so sticky”.

And while the Big Four seemingly remain silent, Bendigo Bank has spoken out in response to Mr Pallas’s claims. Saying credit cards work in a different way to fixed term, secured lending products like home loans, the bank pointed out that credit cards create a higher risk for providers, and have to include the cost of write-offs and payment defaults within their offering.

The bank also pointed to the fact that credit cards don’t just act as a tool for accessing credit, they also offer added extras, like insurance and rewards. The implication being that those extras cost providers money, which they must make back in some way or another.

Responding to Mr Pallas’s suggestion that credit card interest rates should be tied to the official cash rate, the bank had this to say: “As funding costs represent a smaller portion of our cost base, there is less direct correlation with the RBA cash rate.” (3)

Making Change as a Cardholder

At this point in time, it seems unlikely that there will be any significant change to the way credit card rates are determined. But, that doesn’t mean you can’t make change as a cardholder in the rates you pay on your credit card.

Back in February, Reserve Bank Governor Philip Lowe expressed “frustration” regarding the high interest rates on some credit cards. Based on his message urging Aussies to find “better products” and move away from high interest credit cards, we’re going to show you how you can do just that.

First things first though, why should you bother with a low rate card?

✓ To save on interest. The main reason to choose a low rate card is obviously to save on interest. If you carry a balance on a card with a high rate, you will pay out more in interest than you would on card with a low rate. It’s simple maths.

This will be of most interest to you if you often carry a balance on your card.

✓ To give you somewhere soft to fall. Many cardholders routinely pay off their balance at the end of each month. Doing this, they avoid paying interest. Sound like you? While this is a great way to deal with credit cards, there may be times when you can’t clear your balance, perhaps because you spent more than you usually would, or you have less in your budget to cover your repayment.

With a low rate card, you can fall back on that low rate during those periods when you can’t pay off your balance at the end of the month. Then, as you pay less in interest, you can put more towards paying down what you owe.

✓ To get more value from rewards and extras. When you pay out in interest, you lose value on any rewards you earn or extras you use. Considering the fact that you may already be paying out big in annual fees, it becomes even more important to lower your interest costs if you want to see value on your card.

While clearing your balance to avoid paying any interest is best, if you only occasionally carry a balance on your card, you can limit the damage with regards to interest by choosing a low rate option. With that being said though, you’ll see when comparing the options that most rewards credit cards come with a higher rate as standard, especially platinum high earners.

✓ Because you can. Another reason to choose a card with a low rate may simply be because you don’t see why you should pay a high rate to access credit. If there are credit cards out there with rates as low as 8% p.a., why would you bother with a card that has a rate as high as 22% p.a.?

5 Steps to Switching to a Low Rate Card

Okay, now we know why you might want to choose a low rate card, let’s get into how you can make the switch.

Step 1. Consider your financial position

When making a change to your finances, one of the first things to do is take a step back to consider your current financial position. This usually starts with a budget. Use online budgeting tools to work out how much you have coming in – and where exactly that money is going.

Looking at that info, you may see areas in which you can cut back, freeing up money that would be better spent elsewhere. Or, you may uncover areas that needs more attention, such as building savings or paying down debt.

Step 2. Compare your options

Once you know where you stand – and what changes you need to make – you can start looking at low rate cards. Using CreditCard.com.au, this task becomes much easier. Simply check out the low rate cards, then narrow your choice according to what else you want from your card.

Want a low rate and a low annual fee? You could check out the Teachers Mutual Bank Credit Card, which currently has a promotional purchase rate of 7.90% p.a. for six months (reverts to 11.50% p.a.) and no annual fee, or the American Express Low Rate Credit Card with a rate of 10.99% p.a. and no annual fee.
Want to earn rewards on a card with a low rate? These are not so easy to come by, but you could take a look at the flybuys-earning Coles Low Rate Mastercard with a rate of 13.49% p.a.
Want extras on the side of your low rate? Why not try the George Vertigo Platinum Credit Card or the P&N Bank Visa Platinum Credit Card on for size?

There are heaps of low rate cards out there, it’s just a matter of comparing what they have to offer and matching that to your needs as a cardholder. Our handy comparison tool takes the stress out of that comparison process – and you can then check out reviews of each card to drill down on what else they can offer you.

Step 3. Read the small print and apply

Once you’ve found a card you think will work for you, it’s time to get into that small print. The provider should state what conditions you’ll need to meet to be eligible. This may include earning over a certain amount each year, or having good credit. If you’re unsure, check with the provider before you apply. You should also download and read the terms carefully.

When you apply for a credit card through CreditCard.com.au, you will be directed to the card provider’s application page. From there, simply follow the prompts and answer all questions truthfully, while being careful to make sure you answer each question correctly.

TIP: Before you hit apply, it’s a good idea to gather any documentation you will need to provide to back up your application. This will typically include documents that prove your identity, such as your passport or driving license; and paperwork to prove your income and financial circumstances, such as payslips and bank statements.

The provider will also ask about how you spend your money, so you may want to jot down some rough numbers on your monthly or yearly spending within each category. If you created a budget in Step 1, this info should be close at hand.

Step 4. Consider a balance transfer

If you’re switching to a low rate card from a high interest card with a balance owing, you may want to check out balance transfer options. By taking advantage of a balance transfer offer, you could transfer that balance to your new low rate card, to then pay down your balance faster as you pay less in interest.

But, to make a balance transfer work, there are some important rules to remember.

Create a repayment schedule. Work out how much you will need to pay off each month to pay off your entire transferred balance within the introductory period.
Avoid new spending. Try to avoid spending on your new card until the transferred balance has been paid off. New spending will not benefit from interest free days while there is a balance transfer on the card. And, adding to your balance will make it harder to pay down what you owe.
Close your old accounts. By closing unwanted accounts, you can avoid the temptation to spend after freeing up that credit limit.

You will typically request a balance transfer during the application process, however, some cards allow you to request balance transfers after the account has been created. Once the card and balance transfer have been approved, the new card provider will set the wheels in motion on the transfer, after which point you can begin to pay down the transferred balance – and close the old account.

Step 5. Get to grips with your card

You’ve been approved. Congratulations! You will receive your card in the post within a week or so. From there, you will either receive the PIN separately, or you can set up one online. At this point, take time to get to know your card’s online banking page or app, and find out what kinds of tools it offers. These could include card locks, spending limits, and budgeting tools.

You may also have the option to set a lower credit limit than the one you were approved for. This could be helpful if you want to limit your ability to spend, or if you’re considering applying for either a home loan or personal loan in the near future.

Got questions? That’s what we’re here for. Whether you want to know more about the application process, or how a particular card works, hit us up with your questions and we’ll do our best to help!