Little relief for credit card holders

Falling rates might be great news for borrowers with a home loan but credit card holders have had little relief despite rates official rates dropping 3% in the last four months of 2008. According to a report by research group Canstar Cannex average credit card rates have fallen by only 0.26% from 16.63% to 16.38% during the period of September 1, 2008 to December 8, 2008.

“From a lender’s point of view, in this unstable financial environment where there is great competition for funding, credit cards are not at the top of the list. Credit cards offer unsecured debt and there is no real guarantee the banks will get their money back,” says the report. “Financial institutions are reporting more and more cases of consumers defaulting on card payments. It is clear from the banks’ initial unwillingness to reduce rates that they are anticipating further defaults on credit card payments. This has a flow-on effect and means the rest of us have to pay higher rates to compensate for those losses forecast.”

The good news is that since the report was released in early December some lenders have announced credit card rate cuts – including the major banks. Westpac fore example has cut rates by about 1.75% on some cards since September says Canstar Cannex.

Has your credit card issuer done the same? For those of you that don’t pay your balance in full each month it doesn’t matter either way. For those who carry a balance then it’s a big deal. For example let’s say you have $3000 owing on your credit card at 16.63% interest and you pay off $100 each month (and make no new purchases) it will take you three years and four months to pay off the debt and you’ll pay $905 interest. If the entire 3% rate cut had been passed on and your rate was only 13.63% assuming the same scenario you’d pay the debt off a couple of months earlier and save $216 interest.

If you do have an outstanding balance on your card it’s definitely worth taking up a balance transfer offer. The St George/BankSA Vertigo MasterCard, winner of Money’s 2009 Cheapest Balance Transfer Credit Card award, charges 0% on balance transfers for up to six months. After that you’ll pay a pretty low rate of 11.89%. Other institutions have similar deals.

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