An INTEREST-ing Question ?

The Reserve Bank is investigating the record gap between official interest rates and what is being charged on credit cards in Australia.   On May 6, 2015 the "Cash Rate " dropped to to 2% and immediately interest charged on home mortages moved downwards.  No similar drop occurred on the "Plastics " that underpin home finances for most of the population.

Australia is served by four giant banking corporations and they have a vice like grip on providing credit to the masses.   It all started in 1974 when Bankcard arrived on the scene.  This innovation by our combined banks saw credit cards arrive in people's letterboxes, opening up a whole new world of credit.   Prior to Bankcard, the usual option for a loan was an interview with your bank manager in the hope of approval of an overdraft.

Many thought this wide distribution of credit to the masses was risky business.  It was virtually an unsecured loan  and many card holders overindulged and amassed debt.  Because of this high risk, the interest charged was way higher than on most other forms of lending.  Making a purchase on a plastic credit card quickly replaced the old "Hire-Purchase " agreements that previously financed the purchase of television sets, fridges and washing machines.    Australia was up and away on a credit junket that has never ended.

The banks are cagey when it comes to information on debt recovery.  They admit that some debt can not be recovered and is written off, but claim that this level remains static.  What is so obvious is that an interest rate of somewhere near twenty percent is something that makes ordinary investors simply drool when compared to the traditional investment market.  In particular, self funded retirees are battling to gain even a living wage from their nest egg investments.

Even a few scribbled calculations on the back of an envelope show why the banks are growing rich from credit card interest.  In an age when the official cash rate is at a low two percent, even a bad debt write-off of five percent delivers a profit that surpasses all other avenues of finance.  There are competitors offering slightly lower interest rates, but the banks hog the high ground of credit provision and are virtually unchallenged.

Bankcard was closed down in 2006 and the two big money movers of the credit world - Mastercard and Visa -  became the credit providers on the signature cards the banks issued.  They are very efficient at collecting their debts and we are now seeing aggressive advertising offering to allow an interest free period of time to those who bring their outstanding balance to a new credit provider. These lenders are confident that the high interest charged will even out the interest foregone and that the borrowers will continue to use debt as the balancing factor in living their lives.  The credit card industry relies on human nature, and preys on the vast majority of people who do not fully settle their account at the end of each month.

The Reserve Bank would like to see an easing of interest rates on credit cards but that will be difficult while the banks  continue to shower cards indiscriminately with little interest in the credibility of the holders.  This "shotgun " approach relies on the vast majority paying their debts to balance out the deadbeats - and ensures that high interest rates will continue to prevail.

It is obvious that a lower interest rate would be feasible where unsecured debt was replaced with lower interest cards offered to those with assets.  Lower rates apply to those financing a new car because the car itself acts as collateral.  Payment arrears may result in the vehicle being repossessed and sold to recoup what is owing.

The banks seem disinterested in moving to a two tiered credit system where those with equity in a home or have a portfolio of shares - or run a business - are offered a partly secured credit card at lower interest rates.  They think they have the muscle to ignore the Reserve Bank and the present credit card arrangements are contributing heavily to their profits - and must be retained.

No doubt the Reserve Bank will muse at length on this conundrum - and reach no conclusion.  It would be dangerous ground to force change by legislation - and this is not an issue that is high on the public agenda.   High credit card interest rates have been with us so long that they seem to have attained grumbling acceptance !