It’s come to light that, in case you didn’t know it, Australians are being ripped off as credit card consumers…in a BIG way.
While the Reserve Bank have been keeping a lid on interest rates for the past two years, with the only movement in a downward direction, the banks have continued to up interest charges on that good old ‘plastic fantastic’.
These not so startling revelations – well, from where I’m standing anyway – came to light in a news.com.au article, which outlined the findings of an ongoing Senate economics committee inquiry.
Why was an inquiry called into the price of Aussie consumers using credit cards over cash?
Well, it was prompted by figures from the Australian Prudential Regulation Authority (APRA), which demonstrated a massive 70% increase in the price of paying with plastic.
To put that in dollar terms…the amount of bad debt we’re taking on with these high interest, compounding credit facilities has almost doubled in the last ten years, rising from $3.1 billion in 2004 to $5.4 billion in 2014.
Banks caught with their pants down
The inquiry has already heard from a number of high profile economists and finance industry analysts, including David Koch and Ross Greenwood.
More recently, representatives from AMEX, MasterCard and the NAB, to name a few, were called on for their side of the story.
So far, findings suggest that the credit card sector is very well contrived to benefit the banks, whilst draining many middle-income family coffers, with little benefit to the end consumer who’s essentially being flogged for larger repayments.
I personally think those of us who’ve lived through the experience of apparently infinite credit card debt could have told them the same thing.
Inquiry deputy chairman, Liberal senator Sean Edwards said, “The committee has heard competition in the credit card market isn’t having much impact on interest rates which continue to rise, even while the cash rate drops. I look forward to hearing from industry as to why this appears to be so.”
Now, I don’t want to mention the other ‘c’ word that often enters the equation when you create an environment of supposed ‘competition’, in a market dominated by a small percentage of power players. Petrol prices come to mind.
But it’s interesting to see the ‘illusion’ of competition within our four pillar financial system seemingly being challenged by this inquiry. See what I did there?
Let’s face it; up until now, there’s never really been a great deal of transparency or justification for the double digit interest rate charges applied to credit obtained with a piece of plastic.
Inquiry chairman, Labor senator Sam Dastyari told News Corp Australia that he believes banks have been hoping no-one was paying any attention to the “big jump in money” they were making from credit cards, particularly since 2011.
“Australians are being ripped off,” said Captain Obvious.
The big save?
One Big Switch is currently running a new campaign to gather consumers en masse, and demand better interest rate deals for credit cards.
Campaign director Joel Gibson, likened the national credit card bill to a “termite colony inside family budgets, multiplying and eating away at funds that should be spent on more vital things.”
The Big Debt Switch has attracted 50,000 households and counting, with a groundswell of interest from Australian families who’ve simply had enough of chasing their tail with mounting, non-productive debt.
“They are sick of sky-high credit card interest rates and they want to do something about it,” said Gibson.
Gibson and The Big Switch crew have taken on a noble cause, trying to reinstate people power when it comes to how much we repay for the collective debt we accrue on credit cards.
It’s difficult not to wonder cynically though, how much influence people power will really have in a sector driven by profit power.
What do we think?
For our money here at Trilogy, credit card debt is something to be avoided at all costs, particularly for property investors. Here are a few reasons why:
- It’s non-tax deductible and therefore won’t assist your cashflow position.
- It’s a liability when it comes to your serviceability with the banks on any new loan applications.
- The reverse compounding interest effect these debts have is enough to send anyone into a financial black hole…even if you start out on the road to good intentions of making each monthly repayment.
We advise clients who want credit cards for the reward programs that some come with, or as emergency funds, or just because it’s offered with a professional loan package, to keep your limits low and put cash onto it BEFORE you spend.
If you’d like any other insider tips on how to avoid or overcome non-productive, compounding debt and increase your cashflow and serviceability profile with the banks, why not get in touch with the Trilogy Funding team?
Click here to connect with one of our experienced brokers today, and you’ll see how partnering with us can accelerate your wealth creation journey and help guide you to the right results.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).