Did you know there were over 16 millions credit cards on issue in Australia?
And did you read that the recent Senate’s Standing Committee on Economics Inquiry into the interest rates charged on Australian credit cards pointed out the low levels of financial literacy in Australia?
And this particularly relates to credit card debt.
In an ANZ Blue Note , Steve Worthington, Adjunct Professor at Swinburne University spells out the…
Five misconceptions about credit card interest rates:
According to a survey of 2,200 credit cards holders recently conducted by ME Bank for submission to the inquiry:
- Seventy three per cent of those surveyed did not know the interest rate they would be charged if they borrowed on their credit card.
- Consumers are often unaware of ‘low interest, no frills’ credit cards.
- Despite the relative ease of ‘switching’ to another credit card provider, 78 per cent of cardholders have never ‘switched’.
- Introductory offers and low interest balance transfers often seem attractive as consumers think they can pay off their balance within the given time frame.
In reality many people are not able to do this and once the ‘honeymoon’ period is over, the interest rate usually reverts to the higher ‘go-to’ rate.
- Balance transfer repayments made by cardholders are often only used to pay off the balance transferred, whilst any new purchases made on the new credit card, are often charged at the higher ‘go-to’ rate.
This can leave the cardholder with a higher debt balance and with a higher interest rate than before.
Five ways to improve financial literacy in this sector:
- Provide more information to cardholders on the monthly statement about when interest begins to be charged on a balance and the various rates for purchases and cash advances.
- Advise cardholders that if they chose to ‘revolve’ their debt, what the order is in which any repayments will be allocated to different uses of the card, for example cash advances; purchases; balance transfers.
- Provide every cardholder with an annual credit card statement, which totals all transactions made; total interest incurred; total fees and charges incurred and what those other fees and charges are for.
- Encourage the sharing of both negative and positive credit card data by card issuers and encourage consumers to access their credit score, to then be better placed to negotiate a better deal for themselves when they apply for credit.
- Draw consumers’ attention to the dangers of irresponsible borrowing and to the high cost to them of payday loans, as well as the dangers of seeking credit from lenders who are outside the scope of the regulated arena.