Credit Card Rates Rise For Christmas
Sydney Morning Herald
Wednesday November 23, 1994
THE Reserve Bank's recent 1.75 per cent hike in official interest rates will soon take a chunk out of your wallet - just in time for the festive season.
Credit card rates are to rise by up to 1.5 per cent in coming weeks, pushing up the cost of plastic to 15 to 16 per cent on most cards.
The major banks, the Big Four, were first off the mark, with the smaller regional banks starting to follow. Last week, St George passed on its increase- a modest 1 per cent - bringing its "no free days" card up to 15 per cent.
While home loan rates have been largely held to an increase of only 1 per cent or less, as a result of vigorous competition between the major banks and the newer mortgage providers, most of the Reserve's 1.75 per cent increase has been passed on to cards.
For home owners already doing some belt-tightening on the mortgage front, the higher cost of plastic will mean cutting back on some of those more extravagant end-of-year purchases or holiday plans.
National Australia Bank's group manager external relations, Mr Haydn Park, says forecasters expect rates to rise by a further 2 per cent over the next 12 months.
"How we will translate the cash rate to specific products - home loans, personal loans or credit cards - will be a decision based on commercial realities," he says. But he expects that credit cards will absorb much of the rise.
"If you get a rise of raw materials it's very hard to absorb all of the cost when in a competitive environment and margins are skinned down anyway."
But Endeavour Credit Union's chief executive, Mr Alex Sala, maintains banks might be absorbing more of the increases.
"There is a lot of money in cards and a small increase can be a bit of a windfall," he says. "The banks have the ability to absorb more of the increase because the margins on cards are bigger. But people are less price-sensitive to increases on cards."
Endeavour intends to hold its Visa rate at 11.50 per cent for now.
"There isn't a lot of pressure for our Visa card to rise," Mr Sala says. "It won't be this side of Christmas, or January for that matter - February would be the earliest."
The Endeavour card's rate, together with that of the State Bank of NSW, is the lowest in the survey. "As a co-operative we have to be more responsive to our members," Mr Sala says.
By tightening monetary policy, the authorities hope to prevent the economy from overheating and avoid a major surge in inflation as the economy improves
The Reserve Bank lifted cash rates by 0.75 per cent in August (for the first time in five years) and has since raised them again by 1 per cent. But further increases are in the pipeline - and might receive an additional nudge with the 0.75 per cent rise in US official rates that was announced last week
If Australia's official rates increase by about 2 or 3 per cent over the next 18 months or so, card rates may climb to about 18 per cent. With credit costing more, consumers should watch their budgets and not allow themselves to go into the red over the festive period when the temptation to fall back on plastic is at its peak.
Many consumer groups worry that incentive schemes such as Fly Buys -heavily promoted by National Australia Bank which is a participant - may encourage over-spending and lead to increased debt.
Over the past two months credit card applications to NAB have soared by 50 per cent as consumers scrambled to buy with plastic rather than cash to accumulate points.
In its November issue, Choice magazine cautions there is no such thing as a free flight and argues that by shopping around you could easily save yourself the cost of an air fare.
"The danger for consumers is they will spend more money with retailers involved in the scheme at the cost of shopping around," the magazine says. "Over the course of a year you could actually save more money by comparing prices and shopping around than the value of any frequent buyer points you may have accumulated by being loyal to Fly Buy retailers."
The magazine says to get enough points to fly from Sydney to the Gold Coast you have to spend $21,250 at Coles - a major Fly Buy participant. But Choice points out that in its annual supermarket survey (July 1994) Coles emerged as the most expensive supermarket chain.
The publication also draws attention to the onerous rules and conditions of the scheme, warning there is no guarantee it will exist long enough for you to be jetting off anywhere.
Also disturbing, it says, is the fact that information contained in your application form will be held in a database and passed on - together with details of your spending habits - to other retailers for marketing.
"The sooner you join, the sooner you'll be up, up and away," quips the consumer magazine. "But will you be flying in a plane - or floating on a pile of junk mail?"
MS Anne Stringer, the administrator of Consumer Credit Legal Centre, a government-funded service, also questions the intrinsic value of Fly Buys and worries it will tip more people into debt.
"It's definitely going to be a problem," says Ms Stringer. "It will encourage more spending - that's the aim of the program - and it will encourage overspending. Any encouragement to use a credit card to gain points will lead to over-commitment. It's rewarding people for getting into debt."
She maintains that there is a dubious return on the higher grocery prices and higher interest bills. "As I understand it, points have a three-year limit," Ms Stringer says.
"They can't be carried over and they can't be supplemented with cash or transferred to other frequent flier schemes.
"There is also some concern that the airlines will treat you like a third-class citizen, after farepaying customers and their own frequent-flier customers."
With rates on the way, up she warns consumers not to be seduced by the idea of a free holiday.
But National Australia Bank's Mr Haydn Park rejects the idea that the Fly Buy scheme is an incentive to spend more. "It's a loyalty program," he says.
"It is to encourage people to use our card rather than anyone else's. When we're in a low growth era like we are in now, it's very expensive to lose a customer.
"All the advertising and administration costs, which are expensive, are lost. So loyalty programs become very important to retain customers."
Retaining customers means greater card activity, which is essential for the bank as it also earns income from merchants and from its interchange fee.
"Activity is very important," says Mr Park. "Even if half our customers use cards purely as a payment mechanism and don't use the credit facility, the bank is earning income from merchants and from the interchange fee."
Consumers shopping around for a credit card should take their lifestyle needs into account. Cards are basically split into two types: those with an interest-free period (up to 55 days from the date of purchase) and those without one.
Banks usually charge an annual fee on cards with an interest-free period but not always on those without. So you can carry two cards and pay for only one.
By combining a card offering interest-free days plus attractive bonus options, such as free travel, with a free card, you can enjoy the convenience of an interest-free period and benefit from low rates when you need credit for a large purchase, such as insurance.
However, it is essential you understand the terms and conditions of your card. Forgetting to pay your account by the due date can cost plenty.
This is because some banks are harsher than others when it comes to clocking up interest, charging double or even three times as much as their competitors when this happens.
Mr Chris Gosselin, the managing director of Infofax, an interest rate research group, advises consumers to be alert to this.
"In particular, watch those cards such as National Australia Bank and Citibank which charge you interest from the date of purchase rather than the statement date when you forget to pay on time - and offer no further interest-free days on any new purchases until you have repaid all previous purchases in full."
© 1994 Sydney Morning Herald
