Banks bearing ‘gifts’ of credit cards

WHAT can I say about credit card interest rates to the Senate Economics Committee that hasn’t already been said by people smarter, more distinguished, and with far less hair than me, asks SCOTT PAPE.

Generic photo of Australian credit cards.

I WAS asked to front up at the Government’s Senate Economics Committee Inquiry into credit card interest rates.

So this week I’ve decided to devote my entire column to the speech I gave.

THANK youfor the opportunity to appear today.

What can I say about credit card interest rates to the Senate Economics Committee that hasn’t already been said by people smarter, more distinguished, and with far less hair than me?

Yes, the banks are ripping us off — they have been for years.

Yes, there needs to be more innovative competition, like peer-to-peer lending, to drive rates down.

No, it probably won’t make much of a difference.

That’s the truth.

Trying to get adults to change their behaviour is incredibly hard. Jenny Craig and I will never be out of business, so long as people enjoy eating and spending.

That’s what I’ve learned over the past 12 years of being the Barefoot Investor.

And the banks understand this better than anyone, which is why they basically went “meh” in 2012 when the Government began forcing them to include a “minimum repayment warning table” on statements, saying: “A $5000 credit card debt will take you 33 years to pay, at which time you’d have paid $17,181.”

Shocking? Yes.

Did it make a difference? No.

Today we have a $51 billion credit card problem.

And it’s growing.

The truth is that successfully managing your money is 20 per cent knowledge, and 80 per cent behaviour.

And, as I’ve said, change is hard.

So my suggestion to the committee is this: if we’re really interested in making long-lasting change, we’ll get a better bang for our buck by focusing on people who have yet to fully shape their behaviours.

I’m talking about young people — the next generation of consumers — who are being targeted by advertisers more fiercely, and more precisely, than any other generation in history.

At school, kids learn some basic life lessons.

They’re taught to avoid the sun because it can cause skin cancer.

They’re taught that smoking is bad for them because it can cause heart disease and lung cancer. Yet they’re not taught about the dangers of credit cards, and how they can cause “financial cancer”.

Get that message across, young people may start to see the truth.

If you spend less than you earn, credit cards are irrelevant.

They’re not a luxury.

They’re not convenient. And they’re definitely not for emergencies. (If you find yourself in a genuine emergency, a high-interest rate loan from a bank is the last thing you need.)

Even the name is manipulative.

A “credit” card has positive connotations.

After all, who doesn’t want to be given credit for something?

Yet what it really is, is a debt card (though I assume that name was voted down in the original bank marketing brainstorm session).

It’s a simple message — debt cards make everything more expensive.

So why don’t we promote that message to kids?

Perhaps it’s because, up until a few years ago, the only major provider of financial education in the school system has been via the Commonwealth Bank’s Dollarmites student banking, which currently has 273,000 students enrolled. Having Australia’s largest issuer of credit cards teaching our kids about money is like having Ronald McDonald teach your kids about nutrition.

The Commbank has created a library of branded financial content that’s handed out in schools. But the real lesson for the kids happens when Commbank’s marketing database sends them out their first debt card.

Senators, let me ask you to think back to your first debt card.

The Commbank probably included a low-balance card in the basic package they offered you when you were a povvo student — “just to tide you over in an emergency” (like needing to buy the Beastie Boys’ new album, or stumping up for drinks on “students night” at the pub).

Then they kept “rewarding” you with increases to your limit if you used your card.

In this way they were kind of like a drug pusher who gives you your first taste for free, knowing they’ll make their money back a thousand times over.

But that’s not how most kids interpret their first credit card. Instead — subconsciously at least — it goes something like this:

“We’ve done our research on you, Sammy. And we like what we see.

“We think you’re a fine upstanding young person, so we’re willing to entrust you with our precious money.

“After a lot of rigorous research on your ability to repay, we’ve decided to reward you with a credit card that has your very own name on it.

“You can spend it on whatever you please. There’s no need to wait.

“Now, just make sure you don’t leave home without it, because, if there’s an emergency, you’ll need it.”

OK, so that sounds incredibly lame. No one really thinks like that … right?

Wrong. Most teenagers do.

And there’s a good chance that, when you first got your credit card, you did too. It’s seen as a rite of passage into adulthood.

And it explains why the Commonwealth Bank is not only aggressively targeting our schools, but why its CEO, Ian Narev, has publicly stated that he’s basing the bank’s future growth strategy around young people. Commbank clearly sees the potential of our kids. It’s about time we did too.

And with that, I’m happy to take your questions …

Tread Your Own Path!

PS: Bank Australia chief operating officer John Yardley later told the hearing that “if it weren’t for lenders, financial literacy would not be taught to young children”.

He’s talking out his snout. ASIC’s MoneySmart Teaching program (which I’m proud to be associated with) has been giving our kids independent, unbiased, no-catch financial education for the past few years.

Originally published as Banks bearing ‘gifts’ of credit cards