A " New Deal " needed !

A lot of things simply don't add up when it comes to interest rates - and credit cards.   The cash rate in Australia is at a historic low of 2.5%, and yet the holders of " Plastic " have seen interest charged rise from 17.08% to 17.43% in the past year - and annual charges jump from $98 to $ 108.

The banks that issue these credit cards are quick to claim that they are loaning money on the basis of " unsecured credit ".   If the person issued a credit card fails to pay the bank has limited options for recovering the money.   That is the reason that interest rates are so much higher than on a house mortgage - because that is a " secured " loan where recovery of the debt is guaranteed.

In recent times, there has been a trend away from credit cards to the use of debit cards, in which the card simply transfers the nominated amount from the account of the buyer to the account of the seller.   No  " credit " is involved.  The customer is simply withdrawing from his or her own account - and that will only happen if the balance in that account exceeds the withdrawal amount.

It seems that a golden opportunity exists for a " secured " credit card which is linked to assets such as the equity in a home or shares lodged with a bank.  As things stand, all users of credit cards are pooled together as " unsecured borrowers " -  and charged an accordingly high interest rate.   The principle of negotiating a lower interest loan by way of providing security is totally ignored in the credit card industry.

The industry figures on credit cards are interesting.   Last year the amount transacted on credit cards was $ 49.8 billion - and of that $ 34.7 billion was not repaid by the due date and incurred interest.   It seems that a sizeable portion of the public promptly repay and avoid interest entirely and the only advantage to the banks is the annual card fee.  Most likely having a substantial line of credit available is seen as a handy safeguard in the event that they wish to make an unusually heavy purchase.

The banks were quick to recognise that premium brands have social appeal to high end customers.  Strangely, interest rates on such cards are usually even higher than on low grade cards - and the annual fees skyrocket to levels above $ 375 annually.   Often, these cards are geared to " rewards " for attaining high levels of use and this softens the impact of the interest rates charged.

There is little chance of change while banking business in Australia is shared by " the big four " - and they are perfectly happy with the profits  the present arrangements generate.   Gearing interest to the risk level involved is the essence of the money lending trade - and the banks are primarily money lenders.

Separating the wheat from the chaff would seem to be the first consideration in allocating credit - and this is entirely missing in our credit card regime.  Nothing will change - until the market broadens and a wider lending range of institutions has access to the Australian money market - and competition sharpens the deals offering !