You could almost hear bankers breathe a sigh of relief last week as airline officials took their place in the credit card Senate inquiry hot seat.
“We need those surcharges,” they bleated. “Won’t someone think of our profits?!”
OK, I paraphrase but that was the gist of it. Credit card head honchos had similarly argued rate hikes, though the Reserve Bank has in fact cut, were fair and necessary.
The Senate committee is likely to agree with neither claim when it reports its findings on November 24.
In the meantime, the card cronies have wasted no time repositioning to protect interest and fee revenue of some $7 billion a year. Here are the five new tactics they’re hoping will keep us paying through the nose.
1. Extra money
Card providers are using two cynical strategies to get us further in debt and circumvent a ban on automatic credit limit increases that was enacted in 2012. When someone applies for a new credit card, companies routinely offer limits well beyond those requested; where someone has “opted in” to receive automatic increases, they extend huge amounts. While credit limits are not disclosed by individual institutions, I regularly get reports from readers shocked at how much is put on the table.
Another common ploy is to accompany a new large-limit credit card with an attractive, unsolicited cash advance deal. One reader was offered an interest rate of just 1.9 per cent for the first 12 months, a far cry from the usual cash advance rate of up to 24 per cent.
Naturally the aim is to tempt consumers to spend more than they can afford and so lock them into interest over the long term.
2. ‘Free’ money
Speaking of temptation, the number of 0 per cent introductory purchase rate deals has increased six-fold over the past four years – to 19 at press, says data house Mozo. The idea here is to lure new customers with these honeymoon deals and then get them paying big interest. What card providers don’t disclose is that offers are pretty much only ever made on expensive cards; those with a “revert” rate that will keep customers in debt the longest.
3. Hidden balance transfer hits
Balance transfer deals are the other main way providers entice new customers, but today they come with a big sting in the tail. Firstly, it has become commonplace for any outstanding debt at the end of the interest-free period to revert to the cash rate (remember, of up to 24 per cent). Previously it was mostly the far-cheaper purchase rate.
Secondly, some particularly “enterprising” card companies have been whacking on a “balance transfer handling fee” on card set up – 14 deals carry the clawback at the moment, Mozo says. At a typical 2 per cent, this often negates the interest saving altogether.
It’s also becoming usual for the clock to start ticking on the interest-free period at application date rather than approval date, heightening your risk that you won’t clear your debt during that window. It’s vital, more than ever, to read the fine print of balance transfer deals.
4. Higher annual fees
What we pay for the privilege of using a credit card, even if you clear your balance in full every month, has been forging ever higher. Mozo says the average annual fee has risen from $90 five years ago to $111 today. Apparently this is partly due to institutions launching more premium cards that also net them higher merchant transaction fees.
5. Lower minimum monthly repayments
This is not new but a change that’s crept in over the past decade. While 10 years ago a standard minimum monthly repayment was 4 per cent, today it’s just 2 to 2.5 per cent. And you can bet card companies have not made that change out of any sort of consumer benevolence, but for corporate benefit.
Thankfully the time and cost implications of repaying just the minimum is now outlined on every credit card statement. But according to Mozo, the combination of lower minimums, higher fees and astronomical interest rates now means half the cards in the market will never be repaid – and your debt could, in fact, grow.
Mission accomplished, card providers. What might change
Possible recommendations from the Senate inquiry on credit card interest rates, due to report on November 24, include:
- Require a higher minimum monthly repayment. Now an average 2 to 2.5 per cent, a decade ago this was 4 per cent.
- Impose a lower cap on credit card interchange fees, fees paid between merchants and banks that are set by card schemes and usually passed on to customers through surcharges or simply higher prices. These are an average 0.5 per cent in Australia, says Choice, but in Europe they will shortly be capped at 0.3 per cent.Back the government’s plan to limit credit card surcharges to an amount that covers the merchant’s costs only.
- Criticise unconscionable credit card interest rate settings – and do nothing more. The Turnbull government has positioned itself as far too “free market” to mandate any link with the cash rate.