The Government’s happy to continue leaving New Zealand banks to set their own credit card interest rates, despite the Reserve Bank of Australia (RBA) staging an intervention on the issue.
The RBA last week made a submission to an Australian Senate inquiry into credit cards, pulling banks up for increasing credit card interest rates even though their cost of funds has been falling since the Global Financial Crisis.
Australian credit card interest rates are at similar levels to those in New Zealand where neither the Commission Commission or Reserve Bank of New Zealand is mandated to follow the RBA's lead. And nor is Minister of Commerce and Consumer Affairs Paul Goldsmith about to get involved.
“We watch what goes on in Australia with interest, but ultimately, what are the levers that you pull? My sense at the moment is there’s no strong call for any significant intervention in this area," Paul Goldsmith told interest.co.nz.
“Ultimately it’s for the banks themselves to explain the interest rates they charge, and they’ll be under competition pressure if a gap emerges over an extended period of time between the OCR and the credit card rate," Goldsmith said.
Reserve Bank figures show a total of $6.147 billion of credit card lending outstanding as of the end of June, with $4.013 billion of this bearing interest. The weighted average interest rate on personal interest bearing lending was 17.6%.
9 percentage points
The RBA said the interest rate on bank credit card portfolios is about 9 percentage points above banks' cost of funds, while the spread for those borrowers who are paying interest is about 14¾ percentage points.
“These spreads rose significantly in the global financial crisis (when funding rates fell significantly but credit card rates fell by much less) and have remained at that level or drifted modestly higher since," the RBA said.
Furthermore, when the RBA cut official rates in February, Treasurer Joe Hockey said he expected rates on all credit products to fall “immediately”.
“I expect the banks to pass these cuts on immediately… I also expect this to be passed through, particularly for small business owners and to be passed through for everyone that has a credit card. We expect this to cut through right across the spectrum of credit," Hockey said.
Goldsmith has a different take, saying the Official Cash Rate (OCR) is one of many factors that influence credit card interest rates. He said banks also have to take a risk and rewards structure into account when setting rates.
He said credit card interest rates aren’t volatile in the sense that they don’t move as fast as the OCR. (See a chart comparing rates and OCR changes over time here).
Goldsmith: banks are competing & borrowers must behave responsibly
Goldsmith is confident the Commerce Commission will intervene if it finds banks to be behaving anti-competitively.
However he defends the banking sector, saying a “high-level” Treasury investigation done in 2013 and 2014, that's not publicly available, found there is reasonable competition in the sector.
Goldsmith also said people need to take responsibility when borrowing money.
“It’s a matter of consumers understanding what they’re up for in terms of credit card interest rates and I encourage people to be savvy about their debt and make sure they don’t expose themselves to high interest rate if they can avoid it.”
He said the government has been focused on education and delivering financial literacy campaigns.
78 years to pay off $2000 of credit card debt doing min. repayments
The government has also beefed up consumer credit laws through the Credit Contracts and Consumer Finance Amendment Act 2014.
The new rules, most of which took effect in June, focus on lender responsibility. Included is the introduction of minimum repayment warnings on credit card statements. However, last year's Credit Contracts and Financial Services Law Reform Act, to the chagrin of Labour and the Greens, stopped short of introducing interest rate caps. This was after Australia had set interest rate caps for payday lenders at 20% up front, and 4% monthly for the life of a loan.
Meanwhile, this interest.co.nz calculator shows that if you borrow $2000 on an ANZ Standard MasterCard, and only make the minimum repayment of 2%, it’ll take you 16 years to repay your debt.
Paying interest at the current rate of 20.95%, you will have racked up $2541 in interest, leaving you to pay a total of $4541 to get out of the red.
If you use a BNZ American Express Classic Everyday card, it’ll take you over 25 years to repay your debt, while using a Westpac Standard MasterCard will take you a whopping 78 years, according to interest.co.nz's calculator.
Goldsmith repeats a New Zealand Bankers’ Association’s line, that only between 1% and 3% of New Zealand credit card customers make the minimum repayment each month.
He also pointed out half of credit card customers pay off their balances in full during the interest-free period, compared to about a third in the US and Australia.
Goldsmith concludes, “I think we’ve got good grounds for optimism around the way New Zealanders deal with their credit card debt. Yes, we’ve got to make sure there’s good competition in the system.
“Ultimately it’s up to the banks to explain the interest rate that they’re putting on things. That’s as it should be.”