Are credit cards a rip off right now?

In Australia, credit card holders are right now watching the cash rate hover at record lows, taking mortgage rates down with it. It's not something that's being reflected in their card rates. So why aren't these rates moving?

It's a fair question. Cash rates have been reduced from 4.50 per cent five years ago to a current low of 2.00 per cent. Mortgage rates have more or less been reduced by the major lenders in accord with this reduction.

"The underlying economics of the two products are profoundly different."
Mike Ebstein, Director at MWE Consulting

But the focus has switched to credit cards where there has not been a corresponding downwards move in rates. This has caused scrutineers to question if this represents an example of price gouging by the card issuers.

The short answer is: it's not. The details below explain why.


At the outset, it should be recognised that there are a number of fundamental differences between mortgages and credit cards. Credit cards, unlike mortgages, have a relatively low average balance, are unsecured debt and invariably entail a significant number of transactions per account each month.

The underlying economics of the two products are profoundly different with the funding costs on a mortgage being a much greater percentage of product costs than for a credit card.

The interest rate applied to a credit card is one element of a card's potential revenue stream and is relevant only to cardholders who elect to repay less than the total outstanding balance.

Other revenue streams include annual fees and exception fees. The latest available data on card fees from the RBA is 2013 and a review of those numbers with the years back to 2010 shows that annual fees for most cards were virtually static over the period except for Platinum Reward cards where the average annual fee reduced by 17 per cent from $283 to $236.

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However, over the same period, exception fees on credit cards fell by 21 per cent from $293 million in 2010 to $232 million in 2013.

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A number of other factors need to be considered in determining if the failure to reduce rates on credit cards could be considered to be predatory pricing.

The growth in card use over the last five years has not been accompanied by a growth in balances on which interest is being paid.

Despite card spend increasing by 26.6 per cent over the last five years, the balances on which interest is being paid are currently only marginally above the level of five years ago and almost 10 per cent below the level of three years ago.

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Apart from demonstrating a resolve to reduce their overall indebtedness on credit cards, Australian consumers have also shown an understanding of the multiple available payment card options. This has led to a considerable shift away from credit towards debit in recent years.

Additionally, credit card issuers have encountered significantly increased regulatory costs in recent years. Rising disclosure requirements, an altered hierarchy of repayment allocation and restrictions on credit limit reviews have added costs and/or reduced revenues for providers.

When these are considered within the context of the substantially reduced exception fees and a significant decline in interest earned relative to card spend, the increase in net margin on cards flowing from the reduced cash rate does not appear to be unreasonable.

Mike Ebstein is a director at MWE Consulting.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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After several years of losing share to debit cards – reflecting more cautious consumers – the data for 2014 have shown credit cards are back in vogue. But not the credit card of old.