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By Kristina Greene
Consumers are fighting an uphill battle against credit card debt, but issuers have little incentive to lower interest rates. Kristina Greene examines why the market is not more competitive.
He is a New Zealander in his mid-forties with $160,000 in debt racked up over five years on 16 credit cards, three of which are from the same bank.
He recently sought help in a Wellington branch of Budgeting Services to negotiate with creditors.
"Credit card debt and interest rates are a huge problem. About one in three persons consulting us comes from there," says Wellington west suburbs Budgeting Services coordinator Jean Cashin.
She says the number of people requesting help with interest grown out of control have increased considerably in the past year.
"It's just too easy to get credit cards, you can even get them online. Consumers and banks are just as irresponsible," she says.
Credit cards are abundant, but one may wonder why. There are hundreds of plastic moneycards available in New Zealand, but virtually no competition among them – and this works largely to the detriment of users, a Massey University report shows.
Former Massey student Christine Chandran, senior lecturer Claire Matthews, and David Tripe from the Department of Finance Banking and Property wanted to know why credit card companies could get away with high rates.
"What stops the 15 to 25 per cent of card users with outstanding balances above $500 refinancing their debt at cheaper interest rates?" Ms Matthews asks.
She says credit limits on the cards have grown rapidly, with the gap between the benchmark cost of borrowing, the 90-day bill rate, and the rates charged by credit card companies increasing as well.
"How is it that margins have increased, for all major banks, in what is supposed to be a competitive market? And how can banks get away with rates that are similar to each other?
"The answer is that for up to 80 per cent of cardholders, the rates of interest is a trivial issue."
The study found people tended to be aware that paying off the full balance was the most efficient way to operate.
However, despite card users' apparent understanding that interest rates on the cards were relatively high compared with other forms of borrowing, there was poor knowledge of the actual rates.
Of almost 200 participants in the survey, 65 per cent did not know what their cards' current interest rate was and 59 per cent did not know what fees they were paying.
Mostly, card users were unwilling to compare rates, though these range from 5.99 per cent to 23.90 per cent at present. The average standard card interest rate is 18.9 per cent, and the amount outstanding on interest-bearing accounts sits at $2.79 billion.
The growth in credit card usage has coincided with the introduction of loyalty programmes, which promote card usage and generate increased returns to banks through merchant fees and interchange fees.
"If cardholders do not understand the way in which interest is charged on credit card accounts, spending can be rather more expensive than anticipated," the authors warn.
The study concluded that most cardholders don't really know or care what the card costs.
Stanley and Nadia Silver (not their real names), a Christchurch couple with three young children on one income, admit to having no idea how much the fees or rates are on their cards, a Mastercard and a Visa.
Yet this is how they pay for most of their expenses.
"We normally have about $600 to $700 on Nadia's card, plus a couple of hundred on mine. But in the months around Christmas it was over $1000 – and we had to dip into our savings to pay it off," Stanley says.
The couple is among the 50 to 60 per cent of credit cardholders who pay off their full balance each month, avoiding interest and penalty charges.
They make a point out of paying back the balance the same week every month. "It's really a great relationship with our cards because we're very careful. They give you more time to work out payments and put them off for a few weeks – and the loyalty points are great on Nadia's," Stanley says.
According to the study, a quarter of credit card users expose themselves to interest charges but have such low outstanding balances – $500 or less – that the most interest they pay is about $8 a month.
And for the 5 per cent who had outstanding balances of $5000 or more, for whom it was a significant issue, the report cited earlier research showing they were more likely to be credit constrained and have difficulty getting approval to refinance the debt.
Between 1996 and 2003, credit card borrowing rose from about $1.5 billion ($1.1 billion of it interest-bearing) to more than $3.5 billion ($2.5 billion interest-bearing).
At the time the data was being gathered, fees ranged from $15 to $450 a year. Most standard cards charged about $20 but had interest rates of up to 20 per cent per annum.
The research concluded there appeared little incentive to reduce the interest rates from the issuers' perspective. Reasons included the low proportion of customers actually affected, and the need to cover the costs of providing the products.
The authors acknowledged limitations of the survey such as a lack of randomness in the distribution method, the relatively small sample size and low average age of the respondents compared to the general population. They also accepted there was a possible response bias due to respondents possibly wanting to show they used their credit cards more responsibly than they really did.
However, those concerns were partly assuaged by the relative consistency between the results and those of earlier research done in New Zealand and the United States.
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