I did wonder at the time during the course of my credit card train wreck with the Commonwealth Bank, why the interest rate on the thing had remained so high when cash rates had fallen about 3% or so during the GFC. Not that it would've saved me, but paying 17% instead of about 20% would certainly have helped.
Even 17% seems high. In fact it is if you compare the difference between cash rates before and after the GFC; a 13% difference on credit card interest to the cash rate before the GFC, and 18% difference afterwards. If these differences had of remained at the same percentages after the GFC as before, with the cash rate now at around 2% the credit card interest would have been only 15% on my credit card and not 20%. That certainly would have made a big difference to a balance of over $20,000 which I was dealing with last year. Albeit in our position last year it still wouldn't have saved us.
The committee also found that the banks have raised margins on credit cards in a period of falling interest rates. The Federal Treasury told the committee that while the official cash rate had fallen by 2.75 percentage points to current levels of two per cent since late 2011, credit card rates have stayed the same with standard rates sitting at about 20 per cent.Meanwhile, the Commonwealth Bank continues to make profits in the $billions. Last year their profit was $9 billion.
As a result the spread between the cash rate and standard credit card rates is now 18 per cent compared to around 13 per cent prior to the GFC. Low-rate credit cards offer interest rates at around 13 per cent and have also held their rates flat.
TV journalist David Koch told the committee that as a result of this “average Australians are getting fleeced at every step on the credit card journey”.
Many people argued in the inquiry that the growing gap between the cash rate and credit card interest rates could only be explained by the fact providers were taking advantage of consumer inattention to credit card interest rates. The banks rejected that, saying that credit card interest rates were high because of the risks involved in that kind of lending and that Australian rates were similar to this in the US and UK.
However, academic Professor Abbas Valadkhani claimed that the gap between the cash rate and credit card rates was substantially wider in Australia. He claimed if credit card spreads in Australia were like those in the US, Australians would be $840 million better off and if UK spreads prevailed, $2.2 billion better off. The New Daily
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