CUTTING CREDIT CARD CONFUSION
Submission to Senate Economics References Committee
Matters related to credit card interest rates
AUGUST 2015

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mobilising Australia’s largest and loudest consumer
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matter most.
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INTRODUCTION ............................................................................................................................. 4
Summary of recommendations ................................................................................................ 5
1. Trends in the credit card market ................................................................................................. 7
Interest rates have increased.................................................................................................... 7
Few card providers respond to cash rate announcements ....................................................... 8
Big banks have increased interest rates on low rate cards ....................................................... 9
Other card costs are rising ..................................................................................................... 10
Rewards points: rarely worth the cost .................................................................................... 10
$2 billion and counting: the cost to consumers ...................................................................... 12
2. Understanding consumer behaviour ......................................................................................... 13
Factors driving choice of card ................................................................................................ 13
Low levels of card switching .................................................................................................. 16
Over half of consumers pay their full card balance each month ............................................. 19
3. Reform required to reduce the cost of cards............................................................................. 20
Making the cost of a card clear .............................................................................................. 20
Informed choice: the key to personal comparisons ................................................................ 22
Encouraging switching ........................................................................................................... 23
Making switching easier ......................................................................................................... 25
Interchange fees ..................................................................................................................... 28

INTRODUCTION
Credit card costs are hidden in difficult to interpret percentages, behind worthless rewards
points and in bamboozling balance transfer traps. It is far too difficult to answer the most
important question: how much does this credit card cost?
CHOICE has analysed trends in the credit card market as well as consumer understanding
and use of cards. The results show that while consumers have choice in the card market,
there is little competition and plenty of confusion.
This isn’t an accident. Credit card providers rely on consumer confusion. This confusion
means that nearly four in five people have a credit card with a major bank despite the
higher average fees and interest rates. This also allows the major banks to forget about
competing on cost and instead increase interest rates on low rate cards at a time when the
cash rate is at a record low.
It’s time to cut the confusion. Card providers need to be honest and transparent about the
real cost of credit cards. Failure to change will see consumers continuing to pay high
interest rates and unnecessary costs.
There is no one solution, instead a series of interventions are needed to stimulate demand-
side competition. Reforms should make it easier for consumers to compare the true cost of
credit card products, to understand their costs each month and to make it easier to switch
cards. Structural change is also needed to reduce excessive costs in the payments system.
This submission does not explore reforms needed to assist consumers struggling with high
and long-term credit card debt. However, this is an area sorely in need of reform. CHOICE
strongly endorses recommendations made by the Consumer Action Law Centre and the
Financial Rights Legal Centre, particularly that:
    • Additional funding is provided for financial counselling and support services to
       assist consumers struggling with credit card debt.
    • Assessments of suitability for credit cards are based on whether a consumer can
       afford to repay the full credit limit in a reasonable period without suffering significant
       financial hardship.
    • Credit card providers are required to ask consumers what credit limit they are
       seeking, and should not offer limits in excess of that suggested by the consumer.
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Summary of recommendations
#
Recommendation
1
Credit card advertising should include the monthly cost for a consumer with an
average card balance based on the interest rate and annual fee. The figure
should be in dollars to help consumers cut through marketing confusion.
The federal government should launch a working group to establish principles for
an informed choice system for credit cards in Australia, working towards a
partnership agreement that allows consumers to access and use their own credit
card data.
The working group should include government, industry, consumer groups and
privacy experts and work towards establishing an informed choice scheme for
consumers by early 2017.
2
3
Card providers should disclose to customers how much they would personally
save if they switched to the provider’s cheapest card.
The disclosure should be expressed in clear terms such as: “This month you will
be charged $X in fees and interest. On our low rate credit card you would have
paid $X in fees and interest, saving $X.”
This figure should be expressed in dollars, not as a percentage, and be included
on the front page of a monthly credit card statement as well as a range of other
communications to customers.
4
Card providers who offer products through sub-brands should be required to
include the offerings of sub-brands in the comparison between the consumer’s
existing card and other offerings.
Card statements should include information about the credit card market
generally, including the lowest interest rate in the market as identified by the
RBA.
Minimum monthly repayment should be renamed to ‘Payment required to avoid
fees.’
5
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7
All customers on existing products that are no longer marketed should be
switched to the card providers’ cheapest card.
No switch should occur if the legacy product is lower cost.
If the legacy product includes special features that may be advantageous to
some consumers, the card provider should be required to inform consumers that
they are on a legacy product and provide information about personal savings the
customer could make if they switched to a cheaper product.
8
9
The government or an independent party should test any changes to credit card
statements to determine the most useful format for consumers.
Card providers should be required to offer consumers simple online options to
cancel credit cards.
The government should introduce legislation to establish a ‘tick and flick’
switching process to allow customers to easily transfer direct debits to a new
credit card. The process should be offered online and in-branch. It should be
promoted in credit card statements and other key communications to card
holders.
The government should commission an independent report to outline practical
next steps to facilitate switching, including portable account numbers, in the
credit card market.
The RBA should lower interchange rates to reduce the cost of paying by card.
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