Credit card companies are hoarding rate cuts. Shame on them

I’ve seen this movie before – there’s a climactic cliffhanger moment, followed by the promise of an exciting resolution, followed by ... no change, nada, business as usual.

You wouldn’t choose to sit through it again. And yet it gets replayed over and over. So it is being a credit card holder in a downwards interest rate cycle.

Over the past decade, credit card rates have hardly changed.Credit: Atstock Productions

It’s nothing short of a scandal that credit card interest rates barely budge, no matter what is happening with official rates. Full credit to the few credit card providers that have cut rates since they began to fall in February: Auswide Bank, Qudos Bank and Queensland Country Bank.

Because here’s the thing: over the past decade, despite the cash rate moving up and down by more than four percentage points, the average credit card rate has hardly changed. It is sitting at 17.6 per cent per annum versus 16.85 per cent per annum in 2020.

Yes, you may remember some pandemic panic that year, when official rates were slashed to near on zero. Most of that year the cash rate was 0.25 per cent while it plunged further to 0.1 per cent at the end.

How did credit card providers respond? They basically didn’t. They were too busy collecting all that lovely interest from people no longer able to clear their balances in full as the economy was largely halted and incomes hit hard.

Shame on credit card providers for their rate policies: a cut should mean a cut.

The situation was no different when the global credit crack-up had previously struck and the developed world threatened to slide off an economic cliff. Then, official rates plummeted from 7.25 per cent down to 3 per cent – what we were told at the time was an “emergency setting”.

But note that was a far bigger percentage point fall than we saw on the coronavirus crisis… 425 basis points versus only 65 basis points (the cash rate was low at 0.75 per cent when the pandemic hit).

But, yep, credit card companies just kept to their original, no-joy script. Of course, mortgage providers have sometimes played silly buggers with interest rates, variously hiking by more than the Reserve and/or holding back some of its cuts.

Not this time, though. They know the public (and media) scrutiny of their moves is too intense in a cost-of-living crisis. So why do credit card companies get away with such a dire ending, sequel after sequel?

Firstly, because we stick around for it, it’s a bad choice that is on us. But secondly, and mainly, a decrease to credit card interest rates does not decrease our minimum monthly repayment.

These are set ludicrously, bafflingly low at, say, the higher of $20 or 2 per cent of the outstanding balance. Looking at that another way, intransigent interest doesn’t affect your day-to-day spending. However, it massively affects what you will ultimately pay.

Indeed, a high interest rate and a low minimum repayment could very well mean a credit card balance that goes up not down.

What’s important to realise if you have outstanding card debt is you don’t have to take it … there are cards that charge you nothing.

I also asked datahouse Mozo to scour the market for those offering the longest 0 per cent balance transfer – it’s a time-honoured strategy to lure your business across from another institution.

You can get 26 months interest-free from ANZ and 24 months from Virgin Money, Bank of Melbourne/Bank SA/St George, Westpac, BankWest, Citi and Latitude. All have a balance-transfer fee of between 1 and 3 per cent.

What that represents is an up to 26-month window of opportunity to clear your debt once and for all, with every single dollar you repay going towards it. This is why I call these 0 per cent products get-out-of-jail-free cards.

But to make them work for you, there are two clawbacks you need to avoid. The first is that the revert interest rate at the end of the interest rate period will be hugely high. Your comeback is to clear your debt within that period or move it at the end to another balance transfer credit card.

Only do this a maximum of twice as every application for credit slightly depresses your credit score.

The second trap is that new spending is also charged at an eye-watering interest rate. So stick it in a drawer – or in the freezer in ice if need be – just don’t spend anything on this card.

Regular readers will know I’m a fan of flushing your monthly spend through a regular credit card, both for the frequent flyer points and to allow you to sit your salary in an offset account alongside your mortgage for the month.

But the big caveat is: don’t carry over any kind of balance so you never incur any interest.

Shame on credit card providers for their rate policies: a cut should mean a cut.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter, and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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