Why is Credit Card Interest Rising when Rates are Dropping?

Despite record low interest rates set by the RBA, credit card rates still reflect rates of 2008. Why are banks refusing to pass on credit card cuts to consumers?

While Australian credit card holders are slowly reducing the amount of cash advances and their balances as a whole, banks and financial providers are hardly helping.

During September 2008, the official RBA cash rate was 7.00% or 700 basis points. At this point in time, low rate credit cards sat at 10-13%.

Come June 2009, the official RBA cash rate is 3.00% or 300 basis points. At this point in time, low rate credit cards sit at a similar 10-13% average.

Why haven’t banks dropped their credit card interest rates?

In theory, credit card variable rates should have dropped by over than 50%.

But why haven’t rates improved at least the slightest, let alone stayed the same or even increased?

According to a general concensus of Australian banks on the matter, they have denied taking advantage of their customers.

They claim that in the current economic climate, lending has become riskier and they need to adjust their credit card rates accordingly to match the level of risk.

Financial product research group Choice Spokeswoman Elise Davidson claimed that the lack of rate cutting action is selfish, especially in the face of rising unemployment for Australia.

Financial analyst Peter Arnold of Cannex had a slightly more accepting stance on the matter.

Credit cards are unsecured, therefore naturally carry a higher risk. Coupled with contemporary economic uncertainty, it’s no surprise banks aren’t inclined to drop rates.

What alternatives are still available for paying low rates on credit cards?

Aussie is providing some stress relief with their Aussie MasterCard offer. For the first 12 months when you apply and receive a new Aussie MasterCard, you have access to 2.99% p.a. on purchases for up to 6 months.

Commonwealth Bank is providing even more valuable interest rate cuts on their credit card range with their 4.99% introductory offer.

All Commonwealth Bank credit cards are currently offering 4.99% p.a. on purchases and balance transfers for the first 9 months.

Note that after these introductory offers expire, the interest rate will revert back to the standard variable interest rate for the respective product.

Comparison of our Top Credit Card Offers

		Interest Rate (p.a.)	Balance Transfer Rate (p.a.)	Annual Fee	Cash Advance Rate (p.a.)
Bankwest Breeze MasterCard	A low interest rate on everyday purchases with a low balance transfer offer	0% for 6 months (reverts to 10.99% )	4.99% for 9 months	$49	21.99%
Citibank Clear Platinum Card	A low interest rate offer on balance transfers and purchases	11.99%	0% for 12 months with 3% handling fee	$99	21.74%
St.George Vertigo	An introductory offer on balance transfer and a low annual fee	13.24%	0.99% for 6 months	$55	21.49%
Virgin Flyer Credit Card	Earn 1 velocity point per $1 spent, plus an introductory offer on balance transfers	20.99%	1.9% for 12 months	$50 (for first year thereafter $99)	20.99%
Westpac 55 Day Credit Card	No annul fee for the first year with a low rate on balance transfers and purchases	0% for 5 months (reverts to 19.59% )	3.99% for 6 months	$0 annual fee for the first year ($30 thereafter)	21.49%