Credit card rates are far too high

ScreenHunter_05 Jul. 26 10.23

By Martin North, cross-posted from the Digital Finance Analytics Blog

Today we begin to look at the economics of credit cards. We start by looking at interest rates charged on cards. Whilst many households pay off the entire balance each month, those who revolve balances on the card are being hit with relatively high rates. Using the RBA data, we can plot the trends over time.

We find that the margin between the RBA cash rate, and the average standard rate and low rate cards have widened. In fact since cash rates started falling in 2012, average credit card rates have hardly moved down at all. The average rate on a standard card is 19.6%, and on a low rate card it is 13.05%. Many players are offing a zero balance transfer deal, but then the card reverts to standard rates. The RBA cash rate is 2.5%.

CardRate1The RBA provides us with quite detailed data on transaction patterns. The number of cards, and transactions has been growing. There were a total of 15,537,723 accounts open in December 2013. Some accounts will have more than one card issued on it, so the number of credit cards in use are likely to be higher. Cash advances excepted, there were 191,829,963 transactions in December, worth $24,817 million.

CardRate3Interestingly, the average transaction size has shrunk in recent times.

CardRate4So if we plot the balances earning interest against the interest earnt, we see that the gross amounts are pretty high, despite a fall in balances accruing interest.

CardRate2Here is the interest earnt mapped to the cash rate:

CardRate7

Another way to look at the situation is the net weighted margin:

CardRate5This shows that banks have been enjoying a significant increase in margins, especially as the RBA cash rates have fallen.

Finally, fees on cards have also risen (last year of data is 2012 from the RBA), so the argument that there has been a relative re-balancing between fees and rates won’t wash.

CardRate6So why are rates as high as they are? I think that banks are taking the opportunity to bolster their margins, and offset some of the losses in the cards portfolio. Later we will look further at write-offs, loyalty schemes, merchant service fees and surcharges to see if that changes the picture. We will also introduce some of our household research which shows how consumers are shopping around, managing their debt, and who is paying the interest. For a sneak preview, you can read our post from last year on Households and Their Credit Cards. But bottom line is, card rates are too high!

 

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Comments

  1. Balance transfer credit cards have an excellent arbitrage opportunity in them. With minimal effort, you can get the banks to pay you to borrow their money.

    I’ve been doing it for a few years now πŸ˜‰

    • This is where you transfer your existing credit card balance to another card and get a 0% interest rate (or very low) to pay it off quicker?

      I’ve heard this affects credit rating (or at least noted when going for loans) – this true?

      • Not that I’ve noticed. I’ve had about 3 of these things in 3 years. I just applied for another one recently. All you need to have is a card with a limit of X not a balance of X. πŸ˜‰

        It’s a great way to save – since I’m terrible at saving but great at paying debt.

      • But myne, all these applications for credit look bad when you try to go for a home loan one day. If you try. If not, then carry on.

  2. There’s nothing wrong with credit card rates … in fact they should be higher .. way higher!!
    If you can’t afford to pay off your card on it’s full payment monthly due date, you shouldn’t have a card in the first place.
    Stop using it to purchase stuff you can’t afford !!

    • Never had a medical bill higher than your monthly salary? Not uncommon way to end up with stubborn credit card debt.

      • Are you an American? Australian Medicare (and effectively mandated private health insurance for higher income earners) makes this scenario sufficiently unlikely.

  3. I rarely look at credit card’s interest rate.. irrelevant if you are normal and relevant only if you are stupid.

    I have had a CC for over 10 years.. called to check if i can their 300$ PA fees CC.. the person on the other side was very cordial and said “sure”.. i responded can I get “fees waived” as i have been your long customer.. she said “sorry sir blah blah”.. i responded.. “ok how about this… considering i am long customer.. and also jack up the interest rate from 21.2% to 40% and waive the fees on the credit card”?… she was excited and responded…”yes sure i check if I can do that”..she came back “my manager will speak to you and get you sorted”.. imanager came on… he was on the verge of giving me that deal.. bang.. he said “let me look at your credit history…” I knew the deal was off.. he comes back “going by your credit history unfortunately we cannot increase your interest rate to 40% and waive the fees”.. my bad i have been paying every cent off monthly so they would have thought “bugger this guy would not part with his money!”

  4. The problem is that the poor are subsidising the rich and the bankrupt.

    A transaction fee, a monthly account keeping fee, an investment return fee, a portfolio default fee and a very low interest rate payable andan interest rate on credit balances would be more equitable.

    It ought be compulsory for retailers to give a discount equal to the merchant fee for cash.

    The banks and payment companies ought be congratulated for the success of their model. They’re such cunning people!

    • BS. Not one of those fees is justifiable.

      IT’S JUST ELECTRONIC F***ING DIGITS, FFS!!!!!!

      What gives these mutha#*^!$s the ridiculous, utterly immoral, exclusive “privilege” of being able to convert the lifetime of sweat, stress, and toil of every human being on the planet, into ever and ever more REAL wealth for themselves, via usurious contracts, backed by legislation and the f***ing police force??

      ONLY OUR F***ING IGNORANCE AND APATHY!!

      • Then you will love calculating what they make on international ATM transactions. Arbitrage plus fees can be over 15%. Kachingggg!

      • Then there’s the one reader migtronix wised me up to recently; the instant (literally) money market transactions that the bastards deliberately hold overnight — for the same reason — and, charge a fee on.

        I’m not actually enraged at the banksters; as they say themselves, “if we didn’t do it, someone else would”. What brings the red mist for me is that it is all so completely unnecessary, and avoidable, and, that so many (most?) folks don’t even seem to WANT to know how it really works.

  5. Good grief, what sad old punters are paying credit card interest. Put it through a home equity line of credit instead. You earned that equity, you deserve to spend it. As low as 5.0%, capitalised.

  6. Paying off non-deductible credit card debt is about the best investment anyone can make.

    Paying off credit card debt used for income production or business is still a very good after tax investment.

    but retail addicts are like poker machine adicts. Even if they get it intellectually, they just can’t do it because of their emotion or psyche.

  7. Credit card margins (and margins in other forms of lending, like for small business etc) have increased more than those for housing.

    Banks get FAR more negative press about increasing their margins on housing loans, but less so on other forms of lending.

    Therefore, as would be expected, banks are shifting the increased funding costs onto consumers and businesses – effectively cross subsidising mortgage customers.

    I’m not too fussed that credit card margins are increasing above the benchmark, but I am worried that small business get a similar bum deal. Another reason why our housing industry has become nothing but a parasite on economic growth

  8. No consumer is obliged to go into credit card debt. The only reason anyone ever needed to possess a credit card was for convenience of payment. You can now pay just as easily directly from a bank account, without incurring any liabilities in the process. Simple formula for evading these mean, price-gouging banks: consume out of your income.

  9. Too high for what? That’s the market rate and people are paying it. It’s not an essential service so like it or lump it; pay it or don’t. Nobody is twisting your arm.

    • Consumer debt is heavily marketed to the most vulnerable in our society, turning a blind eye or blaming the marketing victims is a little weak, because the number that will fall victim is entirely predictable.

  10. Marketing of predatory products to the young/naive or weak willed and intellectually challenged is mainstream now.

    Just add high interest consumer debt to the list.

    Its what you can do when you don’t actually have any productive economy left.

  11. I don’t call someone that willingly chooses to buy a product a “marketing victim” unless the marketing was misleading.

    It’s also not like there aren’t low-interest options available. If someone walks into a shop, sees two near-identical products and buys the more expensive one, I don’t blame the shopkeeper.

    • Therein lies the great unspoken truth of marketing, it creates markets, it bends, it manipulates and it distorts, and it will do anything for a buck.

      All those poor men and women (and children) who took up smoking over the years did not do so because it happened to be there because it was a choice. And the results from the counter marketing shows just how easily people are manipulated.

      The myth is that people make sensible choices, the truth is that people’s values and choices are soft, fungible and mostly stupid.

      • That’s all well and good but you could then extend any criticism of the credit providers to any industry or company that advertises and makes profits from its sales.

      • No. Just because the line is grey, doesn’t mean we shouldn’t strive to find it. Do you think a company aggressively marketing consumer debt to the vulnerable is to be compared with a company advertising well made stone pavers?

        The more ethically compromised the product, the greater the marketing attempt to normalise the behaviour, to convince people that it’s ok, that it’s part of normal life.

        In most cases the educated, strong willed and thoughtful will see through the lies, the vulnerable are hooked.

      • What evidence do you have that they are deliberately marketing to the vulnerable? As far as I can tell, they are marketing to everybody. The “vulnerable” (however you define that) may have a higher uptake of the products but, again, you could say that about many products. Should we ban Coca-Cola, McDonalds, Swisse and the entire homeopathy industry from advertising? How about home-security companies that “prey” on peoples’ mental insecurities, or pre-paid funeral plans that use emotional tactics in their advertising? I guess we should ban any advertising that uses emotional tactics and/or any product that isn’t suited to everybody’s needs. Let’s start with weight-loss programs and hair-loss treatments. Oh no, just the ‘ethically compromised products’, hey? Yeah, I’d like to see some bureaucrat sitting in an office in Canberra telling me what products are or are not ethically compromised and therefore whether they can be marketed.

        The more ethically compromised the product…
        Credit cards are not ethically compromised.

        …through the lies…
        That’s the thing, they don’t lie, so I don’t see what the problem is any more than Coca-Cola using aspirational advertising, or Just for Men implying that using their product will help middle-aged men pick up young women. If they are lying, there are already laws against that. Misleading advertising should be, and is, banned. Credit cards, even with high-rates, are not banned and should not be.

        Ensure people are not being misled or lied to (which there already are laws to do) but otherwise, people have free will; let them use it.

  12. Come on. CC’s exploit the vulnerable. Everyone knows that. Banks are like drug dealers protected by law.

    • +1 Consumer credit is just another of the exploitative industries we tolerate because the corporate owners have managed to ‘normalise’ them.

      Lets list a few…

      Selling sexualised imagery to pre-teens and teens dressed up as music;
      Selling alcohol as cool to teens and youth;
      Selling gambling as a normal part of sport.

      … etc etc.

      There is a world of difference between tolerating a human weakness and marketing it to the vulnerable.

      • What about the short term money lenders/sharks (cash converters and plenty of others) who charge exorbitant interest rates and target the most vulnerable members of our society? Why do we tolerate so much crap as a society?

      • We tolerate human weakness and vice because to not do so is to criminalise them and create even more suffering in the unregulated and underground market.

        But there is a difference between tolerating them and marketing them to normalise the behaviour. And this is the bit the corporates have been so good at manipulating. We moved from gambling is tolerable in limited circumstances to advertising gambling to kids at sporting events as a normal behaviour.