A Change Is On The Cards

Sydney Morning Herald

Wednesday June 20, 2007

By John Kavanagh

Banks used to adjust their credit card interest rates in line with official cash rates but not any more.

Consumers have become accustomed to seeing rates on their credit cards rise and fall in line with changes to official interest rates. While this is still the case with home loans and personal loans, it is no longer the case with credit cards any more.

Cardholders should be alert to these changes in lenders' behaviour. They may find they are using a card that is now very expensive compared to similar offerings elsewhere.

Early last month Westpac lifted credit card interest rates, by over a half of 1 per cent in some cases, without reference to any movement in official cash rates.

The changes take its rates to 18.99 per cent for the Holden card, 17.99 per cent for the standard and gold 55-free-day cards and the student card, and 16.25 per cent for the no-annual-fee card.

Westpac lifted these rates despite having already adjusted them when the Reserve Bank raised official cash rates last year.

Westpac is not the only bank to have increased card rates this year. Both the Commonwealth and National Australia Bank have put up card rates, although not to the same extent as Westpac.

In February NAB increased the rates on three of its cards by a quarter of 1 per cent. They were the National Low Rate Visa Card, the Velocity Gold American Express Card and the Velocity Visa Card.

In January Commonwealth Bank increased the rate on its Low Rate Card by half of 1 per cent, from 10.99 to 11.49 per cent. The rate on this card did not change last year, so the Commonwealth was playing catch-up.

The moves are evidence of a big change in the credit card market, where the setting of rates is no longer closely tied to movements in the official cash rate. In the past year we have seen some credit card rates remain unchanged when official rates rose and more recently card rates have increased independently of official rate moves.

Lenders are not obliged to change rates when the Reserve Bank makes an official rate change but it has been the convention for a long time.

Denis Orrock at InfoChoice says the decoupling of credit card rates and official rates was due to a number of factors.

Competitive pressure at the low end of the market meant issuers of low-rate cards were forced to keep rates down as a way of building market share. Banks are also trying to reduce the number of products they offer as a way of simplifying their sales and marketing processes.

Most banks issue a lot of different credit cards. By raising rates on some of those cards they are sending signals to the market, prompting customers to review their cards and maybe consolidate or move to a more attractive card.

And banks are passing on more of the cost of running card services. Until a few years ago, a pricing mechanism called the interchange allowed card issuers to charge merchants a high service fee with each transaction. These fees produced much of the profit of credit card operations.

The Reserve Bank has now regulated interchange and cut back the merchant service fees. As a result, card issuers have shifted more of the cost on to consumers through higher annual fees, penalty charges and interest rates.

Orrock said Westpac's move may have been intended to send some pricing signals to the market.

"Westpac has had strong growth in its card business over the past year. Maybe they want to shed some of the more interest rate sensitive customers. Or maybe they want to want to direct business out of these cards to their newer products, Altitude and its travel points card earth," he says.

Some card issuers have put rates up but others, particularly those with low-rate cards, have ignored Reserve Bank increases and left their rates unchanged.

Commonwealth Bank left its Yellow Card at 10.99 per cent (since increased) and St George left its Vertigo card at 8.99 per cent. Virgin left its rate unchanged, as did Bank of Queensland and BankWest.

"It comes down to competition," says Geoff Austin, Commonwealth's executive general manager of retail banking services and lending products.

"The decision to take a low rate card is driven almost entirely by the rate on offer," he says. "People choosing other cards look at rewards programs, features for overseas travel and other parts of the package."

BankWest also has a low rate of 8.99 per cent on its Lite MasterCard. Richard Shepherd, the head of cards at BankWest, says: "There is only one reason people choose low-rate cards. We have taken the opportunity to differentiate ourselves in a very competitive market."

© 2007 Sydney Morning Herald

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