News that the Federal government is about to license some new players into the credit card industry brings the hope of a drop in interest rates. At the moment, this is firmly in the grasp of the big four banks and they offer either Mastercard or Visa cards at an interest rate of about twenty percent.
It is likely that companies such as Apple, Coles and Woolworths may be the new players, but the problem seems to be the risk factor of offering unsecured credit to a wide public spectrum - with the consequent inevitability of some of these loans becoming "noncollectable ". The frugal people who pay on time are lumped in with those who don't !
Half a century ago obtaining credit was a very different matter. It was only available to "people of substance "- and that meant those who had sufficient equity in the home they lived in or other assets that satisfied their bank manager to grant them a loan - at a very reasonable rate of interest, because it was "secured "! That was called an " overdraft " !
Then came the age of "Bankcard ". Suddenly the public was inundated by the unsolicited arrival in the post of a "credit card "and a letter detailing the borrowing limit that had been allocated to each customer. The spending boom was under way - and a raft of credit card companies quickly followed at interest rates that delivered the big end of town healthy profits.
Since then the public has been inundated with temptation. When sales are slow, the car manufacturers offer their product at either low interest rates - or interest free - but with the security of the car itself to back the loan. People who fail to pay have it repossessed. Harvey Norman and the discounting groups offer goods on the basis of no deposit and a long period interest free - but that is only available on big ticket items from their store and draconian terms apply if the eventual repayment is not followed explicitly.
In more recent times, the "Pay Day "loan industry has flourished openly and offers bridging loans for short periods - at extortionate interest rates. This is aimed at "desperate "people and comes with a heavy handed enforcement of the repayment cycle. We are also seeing a return of the days of the "pawnbrokers "- who loaned against the surrender of valuables on a short term basis.
Credit has become a problem for the average person needing a loan for a specific purpose. These days the banks seem disinterested in offering overdrafts and usually fob off such requests with the offer of a credit card - at high interest rates. A death in the family and the urgent need for several thousand dollars for a funeral usually ends that way - and this is at a time when the base national interest rate is at an all time low.
Hopefully, if the granting of new licensees in the credit industry broadens the credit market it may sharpen the interest of credit providers in those who have the assets to "secure " a loan - and thus gain a more reasonable interest rate. The fact that at present the entire credit industry is based on "unsecured "loans makes high interest inevitable to cover the risks of loans that go bad.
The four big banks are "fat and sassy " and disinterested in changing the status quo. If customers are offered a wider choice we may see a more selective approach to approving credit and the decline of the "shotgun " method of showering plastic across a broad spectrum and simply hiking interest rates to even out the highs and lows of repayments.
People who can - and do - pay their bills on time have had a raw deal when it comes to the rate of interest charged. A canny credit provider would see the wisdom of selective customer selection to narrow the field of problem loans - and more appropriate interest rates would certainly ensure applications from quality customers.
It's certainly time that common sense was applied to the field of credit provision !
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