Why most credit cards don’t pass on RBA rate cuts
Bank Australia is the only bank planning a credit card rate cut so far.
Yesterday, the Reserve Bank dropped the official cash rate to a record low 1.50%. As a result, most banks are cutting their rates for home loan borrowers, although many of them are not passing on the full rate cut.
It's a different story for credit card holders though. Even though credit card interest rates are much higher than for home loans, it's very rare for an official RBA rate cut to be followed by a change in credit card rates.
Since yesterday's announcement, Bank of Australia is the only financial institution that has confirmed it will be passing the full 0.25% rate cut onto its credit cards. While Bank Australia is set to publish the new rate schedules for its products on Friday 5 August, we've summarised what the credit card rates should drop to below.
|Card type||Current interest rate||New interest rate|
|Low Rate Visa Credit Card||9.64% p.a.||9.39%|
|Visa Credit Card||12.64% p.a.||12.39%|
|Platinum Rewards Visa Credit Card||18.49% p.a.||18.24%|
It's unlikely that many other banks will follow in Bank Australia's footsteps, though. While some smaller banks and credit unions such as G&C Mutual Bank passed on the rate cuts to its credit cards when the RBA last dropped in May, this isn't a trend we usually see with bigger banks after an RBA rate change. While it's difficult to pinpoint an exact reason, there are a few potential factors that influence the banks' decision to withhold the rate changes on credit cards.
Firstly, most credit cards have fixed rates rather than variable rates, meaning that they're not directly tied to the RBA's cash rate. However, some banks (such as Bank Australia), consider their credit card rates as variable rates, meaning they have the power to maintain or change them as the RBA rates change.
Another reason that banks are unlikely to pass rate changes onto credit cards is that high interest rates are a solid source of profit. Last year, we saw proof of this when finder research showed that Australian cardholders had paid $2.11 billion in interest charges since November 2011 because most banks didn't pass on the RBA's cash rate cuts to their credit card customers.
As most banks profit from holding back rate changes, it's unlikely that you'll see many cutting credit card interest rates any time soon. As ever, comparing cards carefully is the best way to ensure you'll score a low-interest deal.