Special report: This week the Business Herald looks at the cost of credit cards and how consumers can maximise the benefits of shopping with plastic.

Credit card providers are potentially hoovering up an extra $17 million a month in interest by not passing on rate cuts to consumers.

The official cash rate has plummeted from 8.25 per cent to 2.5 per cent between July 2007 and the same month this year, but the average interest rate on outstanding credit card balances has dipped just 0.9 percentage points.

Over the same five-year period the average floating home loan interest rate has fallen nearly 4.5 percentage points. New Zealanders paid around $638 million in interest on their credit card debt in the year to July 2012.

If the average interest rate on outstanding debt had fallen by as much as the cash rate, Kiwis could have saved themselves up to $206 million - $17.17 million a month.


Consumer NZ chief executive Sue Chetwin said credit card interest rates were way too high. "It's money for jam for banks."

But Bank of New Zealand treasurer Tim Main doesn't agree. He says that while the cash rate has come down, the cost to banks of borrowing money has risen significantly with the global financial crisis.

"Offshore wholesale funding and retail savings - all these sources of funding have increased."

Main said that because credit card debt was not secured against an asset like home loans, lenders had to be compensated for the higher risk with a higher interest rate margin.

"Since the global financial crisis there has also been an adjustment for risk."

That argument doesn't wash with Chetwin. "In reality credit card debt is not that unsecured, if you have any savings or a mortgage with a bank they are quite within their rights to use that money to repay the debt."

Chetwin said credit cards were a great tool. "They are convenient and easy to use. But only as long as you have control and they are not controlling you."

She said if consumers were not paying back the full balance on their credit card every month and not using the 55 days of no interest, they should consider switching to another payment method. "If you are only paying off the minimum you will be in debt for a very long time."

Chris Groth, research manager of Canstar, which rates credit cards in New Zealand and Australia, said that in an ideal world banks would pass on cash rate cuts in their credit card interest rates.

"If their [banks'] funding costs have reduced you would expect rates to come down at a similar correlation."

But Groth said other factors detracted from the argument for rates to come down.

"Typically when cash rates come down you are wanting to stimulate the economy because employment is shaky, but then you are probably in a situation where more people are looking to use their credit card to fund any shortfall in spending."

Groth said during these times fraud was higher and credit cards gave consumer protection. If someone skimmed your card and used it, the bank would usually refund the money. "There are a lot of things that we don't put a cost on as a customer - but they do come at a cost."