Why credit card rates won't be coming down

Mortgage rates are coming down but there is no sign of credit card interest rates falling.

The cash rate looks set to come down again but don't expect to see any cuts to your credit card interest rate as a result.

While mortgage-holders are benefiting from sub-5 per cent home loan rates credit card interest rates remain stubbornly high with most of the major high street banks charging 20.95 per cent on their standard cards for purchases.

That's because credit card debt is considered unsecured debt unlike your mortgage where a bank can sell your house if you fail to make payments.

New Zealand Banker's Association chief executive Kirk Hope says the high interest rates are reflective of the greater risk your bank is taking in lending you money it may not get back.

"The greater risk for the bank is reflected in the higher interest rate."

Credit card debt has been steadily climbing in New Zealand and hit a high of $6.547 billion as of the end of June.

In 2000 it was $2.4 billion.

May figures from the Reserve Bank show around $4 billion of the $6 billion was interest bearing.

According to the Commission for Financial Capability around 59 per cent of Kiwis pay off their credit card in full every month.

It hopes to increase that to 70 per cent by 2025 as part of its national strategy.

People who are financially savvy aren't running balances on their credit cards.

Jeffrey Stangl

Hope said there was a range of options available to people with credit card debt including taking a low interest credit card.

Interest charges for those cards are usually around 13 to 14 per cent.

"Some people pay no interest on their credit cards, or they have a low interest credit card.
"Often they go for the higher interest product because of the loyalty offerings and because they pay the card in full before the interest free period ends.

Hope said very few New Zealanders paid the minimum balance owed on their card.

"Between 1 and 3 per cent of New Zealand credit card customers pay the minimum each month.

"This figure is significantly lower than the equivalent statistics in the United States and United Kingdom, where as many as 13-14 per cent make the minimum repayment each month.

"In the US only a third pay in full, whereas in New Zealand it is over 50 per cent."

Hope said the cash rate was only one factor in setting mortgage rates.

Bank rates were also influenced by the cost of sourcing funds from overseas and domestically and the equity the borrower has in a property.

Floating mortgage rates typically reduce in line with the cash rate where as fixed rates are more likely to reflect how much it costs a bank to borrow that money in the international market.

Massey University economics professor Jeffrey Stangl said interest rates were also influenced by competition in the market.

"Mortgage rates are competitive. I think it is just the competitive nature of different elements of the market. People who are financially savvy aren't running balances on their credit cards."

Stangl said those who paid interest on their credit cards were a certain segment of the market which was likely to be more risky.

"The people who do that are people who are in a different sector of the market who are a higher risk in the first instance and don't have access to borrowing money cheaper elsewhere."

Stangl said for him a credit card was an opportunity to earn air points.

If he wanted to borrow more money he could do so via his mortgage at a cheaper rate.

"For me I would go and borrow on my house rather than my credit card."

Stangl said rising credit card debt could also be a sign people were struggling to pay their mortgages and were using their credit cards to prop themselves up.

He said the real test would be when mortgage interest rates headed upwards again.

"People who are in houses they can't afford when interest rates go up definitely won't be able to make the payments and they will already be maxed out on the credit card."