NZ bank says high credit card rates 'area of customer harm', wants investigation

Friday, 14 December 2018

The key to getting out of credit card debt is to act early, before it gets out of hand.

The head of Co-operative Bank has hit out at the credit card market, calling it an 'area of customer harm'.

David Cunningham, CEO of the New Zealand bank, has called on the Government to investigate the credit card industry in the same way it is tackling the retail fuel market.

'I look at all conduct and culture around credit cards and say, hey, there is a real element of harm here,' Cunningham said.

'There are two issues here. First, you have to ask if credit cards are the right way to live. That's a cultural thing.'

The credit card industry needed to face a government review similar to that of the retail petrol industry, says the head of Co-operative Bank.

* Credit card rule: Never pay the minimum

* Shake-up for fees on the cards

* Personal finance: Nine tips to control credit card spending**

'Then, we have to ask if we're getting the best deal on interest rates and is it up to the banks to do something? If not, then should the Government be asking whether it passes the sniff test?'

CEO of Co-operative bank, David Cunningham, says credit cards are an area of consumer harm.

Cunningham said banks needed to focus on what was best for consumers and offer more competitive interest rates.

Co-operative Bank's credit card interest rate was set at 12.95 per cent, the lowest of all major banks in New Zealand.

However, a spokesperson for the Ministry of Business, Innovation and Employment said change was already on its way.

'Credit cards and store cards were in scope of the recent review of the Credit Contracts and Consumer Finance Act,' the spokesperson said.

'They are already subject to consumer protections in the act, which require that the product be affordable and suitable for the borrower. These requirements are expected to be strengthened, with legislation expected to be introduced in 2019.'

New Zealanders paying the minimum on their credit cards would end up paying a significant amount of interest.

According to the Reserve Bank, New Zealanders owed $7.3 billion on credit cards at an average interest rate of 17.9 per cent.

An ANZ spokesman disagreed with Cunningham's assessment of the credit card industry as uncompetitive.

'The credit card industry is very competitive and there is an extensive range of card options so customers can choose the one that best suits their circumstances,' he said.

'At ANZ these include airpoints, reward options and a 13.90 per cent low-interest rate cards - our most popular option.'

Credit card interest rates were higher than other forms of debt because it was unsecured lending, the spokesman said.

'It's not secured by an asset if people fail to pay back what they've borrowed. So the rates are higher to cover that fact.'

A large part of the problem was how people used their credit cards.

Tom Hartmann, managing editor of Sorted, said some studies showed people spent up to 30 per cent more when using plastic over cash.

'People often consider their credit limit as their own money – the amount they 'have to work with' – instead of what it really is: how much they're permitted to borrow.'

Just over half of New Zealanders with credit cards pay the cards off in their entirety each month, he said.

'When people try to claw their way out of debt using a consolidation loan, they can exacerbate the problem by leaving their credit card open. When an unexpected expense arises, the card is used and lands them in larger amounts of debt.'

A spokeswoman for FinCap, an umbrella organisation supporting budgeting services across the country, said their members were reporting an increasing number of issues around responsible lending with credit cards.

'There are issues, especially with high credit card limits,' the spokeswoman said.

'In particular people being encouraged to take higher limits or the automatic offers of credit limits that are higher.'

She said credit cards were particularly problematic when people used them to meet their everyday expenses.

'In the circumstances when people are paying the minimum, then it's going to take them a long time to pay it off and they are going to pay a lot of money in interest,' she said.

'When you get a loan, you go through a particular type of affordability assessment. You should with a credit card as well. But because they are an evolving line of credit, it is hard to check whether you can afford it. It just stays with you.'

The spokeswoman said changes were needed in the industry, but she wasn't sure how it would take shape.

Tips to manage credit cards from Sorted

Pay off a credit card in full each month in order to take advantage of the convenience and skip the interest charges.
If you can't make the full payment, always make more than the minimum payment. This can save heaps in interest and pay off the card much quicker.
Debt is like fire – make sure you master it so it doesn't rage out of control.
If you are going to choose a credit card, make sure to compare the entire market to find the best deal.
Review your card limit: this should be based on how much debt you are comfortable taking on (and repaying), and not simply the maximum amount the bank will give you.
Avoid cash advances on a credit card, which typically cost much more.
Leave your card at home: taking the extra time to consider a purchase on your credit card will lead to better purchase decisions and avoid impulse buying and retail therapy.
If you get in trouble with your credit card, don't hesitate to let the bank know – often there can be helpful repayment options to avoid debt spiralling out of control.