For immediate release
Tuesday 24 February 2009

Time for Banks to Drop Credit Card Interest Rates

Finance sector union Finsec is calling on banks to make significant cuts to credit card interest rates, saying the margins on this form of lending appear to have grown by more than 200% in the last year.

Finsec says that based on the difference between the 90 day bill rate and what banks are charging on their standard credit cards, the banks’ margins on credit card debt have ballooned from around 140% in January 2008 to a whopping 470% this year.

“This level of margin growth at the expense of customers is frankly astounding,” said Finsec General Secretary Andrew Casidy. “The minor reductions banks have made to credit card interest rates are tokenistic tinkering.”

"We calculate that if the banks’ margins remained the same as they were in January 2008, then standard credit card interest rates should be about 8.4% today” said Casidy.

“It’s time for banks to step up and actually do something to help New Zealand customers out. Dropping high credit card interest rates would be a good first step in the right direction and we challenge them to do so and do so now,” he said.

“Many banks are still on track to make record profits, despite the recession. At a time when the Prime Minister and Reserve Bank Governor are asking banks to do all they can for their customers and the New Zealand economy by passing on interest rate reductions, these credit card rates are totally unacceptable,” said Casidy.

“People don’t want platitudes from their banks, they don’t want yet more marketing spin and they certainly don’t want to be taken advantage of in bad times,” said Casidy

Q & A - Credit Card Margins

1) How did Finsec calculate the margins and changes?

Date/90 Day Bill Rate*/C/C Rates - Approx/Margin over OCR Rate - Approx/Margin Growth
08 February 2008/8.76%/21%/140%/
06 February 2009/3.50%/20%/472%/237%

We used a straight 90 Bill Rate vs Interest Rate calculation as it is difficult to assess each bank’s actual cost of providing credit card lending to customers.

But, even if the cost of providing this form of credit is much higher than the 90 Day Bill Rate, the margin growth over this last year might in fact be even larger.

This example shows what happens if we assume the banks’ cost of funding credit card lending is approximately 20% higher than the 90 Bill Rates stated above:-

Date/Cost of C/C Lending/C/C Rates - Approx/Margin Over Cost Rate - Approx/Approx Margin Growth
January 2008/10.50%/21%/100%/
January 2009/4.20%/20%/376%/276%

2) Shouldn’t the Banks be entitled to a higher margin on unsecured credit card debt?

Yes they should, but that higher margin was already built into the rates in January 2008. The issue is that the margin has increased so much, while credit card interest rates have not reduced much at all and the customer appears to be paying significantly more than they ought to.

If margins remained at a similar level to what they were in January 2008 based on the 90 day bill rate, then standard credit card rates should be about 8.4%.

Even if the margin increases were acceptable, but the actual rates charged on credit cards dropped by the same drop in the 90 Day Bill rate, interest rates on standard credit cards should now be about 15.75%

3) Banks offer low interest credit cards now don’t they, so what’s the problem?

Yes they do. The issue is that many people with existing debt don’t or can’t switch to a low interest card. In addition, the debt is still unsecured on these “low” interest cards therefore, why are there still “high” interest cards at all?

4) Banks are entitled to make a profit aren’t they?

Yes they are. But a line needs to be drawn between a reasonable profit and fairness to customers. Banks are some of the largest and most profitable businesses in the country and in today’s economic environment, they should be doing all they can to assist their customers and the New Zealand economy, not expanding their profit margins at their customers expense.

ENDS

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