Households wipe $1 billion off credit card debts in no-spend April

Wednesday, 3 June 2020

At the start of April people with credit cards owed a collective $6.9b on them.

OPINION: People paid over $1billion off their credit card balances in April.

With offices, shops, malls, cafes and restaurants shut and cars left unused in garages, household's diverted money they'd have spent in an ordinary month into paying off their debts.

At the start of April people with credit cards owed a collective $6.9b on them, but by the end the amount owed was down to $5.8b.

There may be early signs of credit card interest rate competition, with BNZ introducing a temporary special purchase interest rate of 9.95 per cent for up to three months on its Low Rate Mastercard.

The great April debt repayment was a massive acceleration of a trend that began in March, the month alert level 4 lockdown began.

* Unprecedented amount of credit card debt repaid as Kiwis tighten their belts

* Why don't credit card rates fall when home loan rates do?

The credit card market, which barely registered a meaningful fall in the global financial crisis, has never seen anything like it.

The amount owed on credit cards ended April 20 per cent lower than at the end of the same month last year.

It would be nice if this market shock shook up the credit card market, and resulted in some decent cuts in credit card rates.

For years the country has let the banks have their wicked way with credit cards.

No matter that interest rates on deposits and bank funding lines have fallen to historically low levels, most banks 'standard' credit cards still come with 19.95 per cent or more interest rates.

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

My hope is that a 20 per cent drop in their market will shake them up a little bit, but I'm long enough in the tooth not to expect it.

Lower interest rates on credit cards would, all else being equal, encourage more spending by cardholders, but all else is not equal. Covid-19 has seen to that.

At the moment, many households see any debt as a threat to their financial stability. People who fear they may lose their job pay off their debts fast, or at least reduce them as quickly as possible.

There's never been much competition in the credit card market because it's boring and time-consuming to switch credit card provider.

People also tend to like to have a credit card with their main bank, so there's massive inertia.

When the public signals its willingness not to quibble over price, there's no incentive for any bank to bother competing on rate.

Instead they've gone with flashy rewards points schemes, which have beguiled so many.

People switch banks when they are angry, or when they get offered a better mortgage rate, or when they see a rewards scheme they like the look of, not to shave a few points off their credit card interest rate.

It's not entirely true we've all let the banks super-profit from credit card interest.

Many cardholders decided long ago not to carry credit card debt, and to pay off their balance every month.

There's no point in them shifting to another bank for a lower rate, as there is no lower credit card rate than zero.

If the banks cut their credit card rates, say, from 19.95 per cent to 15.95 per cent, it still wouldn't persuade them to go back to carrying debt on their cards.

I've been a big fan of short-term zero-interest credit card rates, and always felt people underestimated the risks of carrying debt.

More people see things the way I do these days.

GOLDEN RULES:

* Pay your card balance off each month

* Remember debt carries risk

* Demand a fairer deal