Many Christmas shoppers will have a higher rate of interest on their credit cards this year. Photo / Richard Robinson

Many Christmas shoppers will have a higher rate of interest on their credit cards this year. Photo / Richard Robinson

Banks have increased the interest rates paid by hundreds of thousands of shoppers this year, even though the cost of borrowing set by the Reserve Bank has fallen almost a quarter.

Banking commentators say credit card interest rates have been slow to fall in response to drops in the official cash rate.

The result is that for many Christmas shoppers, the unpaid balances on their cards will cost them more than last year.

Three of the big banks - BNZ, ANZ-National and Westpac - raised credit card interest rates by 1 per cent or more this year, citing the high cost of borrowing.

Since those rises, the Reserve Bank has lowered its official cash rate from 8.25 per cent in June to 6.5.

That has led to lower mortgage rates but not credit card interest rates.

Banks the Herald spoke to said the Reserve Bank interest rate was only one part of credit card costs. Credit card debt was much riskier than mortgage lending because it was unsecured, and the interest rates charged reflected the extra risk - which could increase in tough economic times.

As well, much of the money New Zealand banks used to finance credit card debt came from overseas banks, which were lifting interest rates because of the credit crunch.

The director of the Centre for Banking Studies at Massey University, David Tripe, said credit cards cost more to administer than home loans because they were made up of a large number of small amounts.

But he said it "wouldn't be unreasonable" to conclude that banks had been slow to drop their rates.

Andrew Campbell, campaign director of the bank workers' union Finsec, said banks had not done enough to explain why credit card rates remained above 20 per cent.#He said increasing numbers of people relied on credit cards to pay basic household expenses. Many, particularly lower income earners, were struggling to repay the money.

A survey by credit reporting agency Dun and Bradstreet last month found one in four New Zealanders expected to use their credit cards to cover purchases they otherwise couldn't afford before the end of summer.

A Westpac spokesman said the bank's annual report showed a rise in overdue credit card payments. Credit card fraud, high overseas borrowing costs and the risk of default all added to the cost of providing the service.