Why RBA Governor Lowe wants you to be tight with your credit card

RBA Governor Lowe credit card interest rates reserve bank
RBA Governor Dr Philip Lowe said he is frustrated that credit cards with 20% interest rates still exist at a time interest rates are the lowest they’ve ever been.

If there is one thing that secretly unites almost all economists, it is the “tightwad” effect.

In their view of the world, people always act rationally when it comes to spending their hard-earned money, never wasting money.

In the real world, though, that doesn’t always happen, which really wreaks havoc with their models of how economic changes will play out in the economy.

A great example at the moment is credit cards.

Reserve Bank Governor, Dr Philip Lowe showed the tightwad effect when giving evidence recently about why Australians continue to use and pay interest on credit cards with double digit interest rates – many above 20% – at a time when interest rates are the lowest that they have ever been.

Credit cards charging above 20% should not exist – but they do

“I have, um, frustration that there is still credit cards in the Australian marketplace with interest rates around 20%,” Dr Lowe told a House of Representatives economics committee hearing.

“People write to me all the time saying ‘this is a disgrace, how can this possibly be’, and I have to say I don’t have a good response for them other than there are credit cards in the Australian market place with much, much lower interest rates.”

“Some with perhaps high single digits. And as I say to people with mortgage debt – shop around – because there are good products out there in the marketplace that offer people much better deals.”

The really tragic thing about expensive credit cards is that they are costing people serious money that they could use in other more rational ways to buy products and services.

People once again building up interest bills on credit cards

Surprisingly, those expensive credit cards are now getting more of a workout and accruing interest – even at a time of high savings and official interest rates that have never been lower.

While it has appeared in recent years that Australians have finally wised up on their use of credit cards, the latest figures have shown an unusual reversal.

Credit card balances accruing interest recorded a $205 million rise in December last year after a $199.2 million rise in November.

Before those two monthly rises, the last time Australia recorded an increase in credit card balances accruing interest was way back in June 2019, following another instance in June 2018.

Fewer people are paying much more

The more worrying thing about these figures is that they also show a continuing decline in the overall number of credit card accounts, which fell 34,961 in December.

That means the “really bad” debt burden of very slowly paying down high interest rate credit cards is falling on a smaller number of card holders who have persistently high credit card balances.

It is worth remembering that these rises come alongside the explosion of Buy Now Pay Later schemes, which have replaced credit cards for many millennial shoppers.

Rises may mark the end of super withdrawal scheme

The end of the super withdrawal scheme that helped many people pay down personal debts may also be a reason why credit card balances have begun to rise.

Debit card use has been growing very strongly, with RBA figures showing an 11% increase in spending on debit cards in December over November, while year-on-year debit spending was up 18% to $6.27 billion.

Of course, the rational way of dealing with expensive credit card debt would be to avoid it, either by spending on a debit card or by paying the credit card balance off in full at the end of each month.

Or you could follow Dr Lowe’s always rational advice: “If you have a credit card with a high interest rate and you don’t like it, go and find another one.’’

Boom in mortgage switching shows consumers can be rational

There is some hope that Dr Lowe’s pleas might get a good reception though, given that he has long argued that consumers should shop around for the best home loan deals and refinance if required to free up extra spending capacity that would otherwise be wasted in needless interest payments to banks.

Dr Lowe said his campaign to switch was working with Australian Bureau of Statistics data showing that 237,632 people have refinanced their mortgages since the pandemic began – a shop around mentality that could be widened to apply to credit cards.

“I’ve been giving that advice to people with mortgages all the time, and that’s actually been working because we’ve seen the average mortgage rate being paid by Australians decline over the past six months by quite a lot,” Dr Lowe said.

“If collectively, we as Australians do move to the better products, then the banks will have to withdraw the bad ones.”

Inertia can be costly

Of course, inertia is the problem here – once people get used to doing something a particular way or using a particular credit product, they tend to remain stuck in their ways and keep using it.

So, the time has arrived to listen to the voice of reason, review your credit card usage and interest rate and the home loan as well and get some extra money to spend each week.

Tightwad economists and their poorly performing economic models will thank you for it!

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