Money: Card interest defying gravity

By MARK FRYER

Listen. That deafening silence you hear is the sound of the banks announcing cuts to their credit card rates.

It's not that they haven't been busy reducing rates this year. It's just that credit cards seem to have been forgotten in the rush.

Mortgage rates have come down sharply, following interest rate cuts by central banks all over the world.

When the Reserve Bank cut 0.5 per cent off its Official Cash Rate on September 19, the major banks chopped the same amount off their floating mortgage rates almost instantly.

They've also been trimming deposit rates - the interest rates they pay you for term deposits and other investments.

But it's a different story when it comes to credit cards. In August 2000 the average rate on a standard credit card was 18.6 per cent. As of August this year, Reserve Bank figures show, the average rate on a standard credit card was still 18.6 per cent.

The Reserve Bank hasn't yet come up with the figures for September but it's not hard to work out the average rate on a standard card and come up with an estimate of, you guessed it, about 18.6 per cent.

Such consistency is remarkable. Over the same period the average floating mortgage rate has fallen from 8.67 per cent to 7.19 per cent. The Reserve Bank's Official Cash Rate - which sets the tone for many other interest rates - has been cut four times, falling from 6.5 per cent to 5.25 per cent.

"It is disappointing. People use their credit cards more and more these days and it's extremely disappointing to see credit card rates lagging behind other movements in interest rates," says Simon Wilson, editor of Consumer magazine.

However, the ASB Bank's Barbara Chapman points out that there have been times when credit card rates stayed stable while other rates were rising rather than falling, as they have been lately.

BankDirect's Kevin Leith says banks are now offering card-users a choice; cards with low annual fees and up to 55 days interest-free, but with high interest rates; and other cards which have lower rates, but higher fees.

But why the difference when it comes to changing rates? Why do the banks move so fast when it comes to mortgages, yet leave credit card rates unchanged?

The answer may have as much to do with psychology - in particular our ability to delude ourselves - as it does with finance.

According to David Tripe, director of Massey University's Centre for Banking Studies: "People don't think they're borrowing on credit cards so therefore the interest rate is of no importance because they're not going to pay the interest because they're going to pay it off ... aren't they?"

At least that's what overseas research shows, and Tripe believes it's much the same story in this country.

The fact that credit card debts are smaller than mortgages also makes the interest rate less of an issue, he says.

Could it be that card rates are so high because many people don't pay their card debts, forcing the rest of us to subsidise them?

Probably not. While hard numbers are hard to come by, Australian figures from the big four banks show that only six out of every 1000 cardholders default on their repayments. The dollar value of those bad debts is about 1.8 per cent of all card lending, and Tripe suspects that figure is even lower here.

The banks say more customers are getting clever with their cards, paying them off on time so they get up to 55 days free credit.

If that's the case, plenty of not-so-well organised card users are taking up the slack; Reserve Bank figures show the proportion of credit card debt which is incurring interest has stayed relatively constant, at about 70 per cent.

Then there are some more Reserve Bank figures which show that the "effective" rate on personal credit cards - taking into account all the varying rates and the fact that some of us don't pay anything - has actually risen over the past year, from 12.7 per cent in August 2000 to 13.4 per cent in July, the last month in which figures are available.

Tripe says the banks may not be making as much from their cards as the interest rate alone suggests.

"If you've got big volume at current prices it is good, it's great business," he says, but some local banks have a fairly small number of cards on issue.

"Even though they may be charging 19 per cent or whatever, the amount of actual revenue that generates for them is quite small relative to the processing costs and things like that."

In the end the answer is simple. Why do the banks charge so much? Because we're prepared to pay.

As of July, the latest month for which figures are available, we had $2.89 billion outstanding on our personal cards, up almost half a billion dollars on a year earlier.

With that sort of increase, consumer resistance is the least of the banks' problems.

* Contact Personal Finance Editor Mark Fryer at: Business Herald, PO Box 32, Auckland.

Phone: (09) 373-6400, ext 8833. Fax: (09) 373-6423. e-mail: mark_fryer@nzherald.co.nz.