Interest and ignorance
Using your credit card to borrow money is rarely a good idea – in fact, it can quite easily become a formula for financial ruin. Credit card companies often gloss over the truth with tricky promotional offers and complicated rewards schemes, and unfortunately these sneaky tactics appear to be working. Our survey results show that 48% of Australians who used their credit card recently weren't sure how much interest they would be charged.
Interest rate ignorance has meant a big windfall for the creditors. Since June 2011, the average credit card interest rate has moved 176 basis points above the Reserve Bank's cash rate, earning the banks an extra $630 million in a single financial year. Bit by bit, the banks have been sneaking their rates further away from the baseline. The last time we checked, the average credit card interest rates sat 14.41% above the cash rate, up from 12.65% above the cash rate in June 2011.
That adds up to a lot of debt – and a lot of uncertainty.
"As a nation, we're paying interest on more than $36 billion of credit card debt, yet almost half of us are uncertain what it costs us," says CHOICE CEO Alan Kirkland.
"Credit cards are marketed as a convenient payment option, often with a modest annual fee, honeymoon interest rate periods and seemingly lucrative rewards programs. But the real rewards program here is for our banks, who earn an estimated $6.2 billion in revenue from average credit card interest rates of 17.16%."
Time for credit card clarity
A simple comparison using our Compare, Ditch and Switch site shows the average cost of the five lowest-rate credit cards is $1300 less than the five most expensive over three years, assuming a balance of $3000. That's a significant sum.
We think it's time for the federal government to improve customer access to their own consumption data to assist in complex decisions, including around credit cards.
"We welcomed important reforms to make credit cards less confusing, including information on statements about what happens if you only make minimum repayments," Kirkland says. "This should be taken further, borrowing from overseas approaches like the UK government's midata program, allowing consumers to make unbiased comparisons of credit products based on their actual spending and repayments over time."