Interest Not Interesting

Why is it that the Reserve Bank feels that increasing and decreasing of interest rates is the way to control the growth of the economy? Correct me if I am wrong, but doesn’t this only affect people who have a mortgage? And doesn’t it only help people if the banks pass it on? What about renters? People with other debts like personal loans and credit cards? Only the banks benefit. The most recent interest rate cut of 0.25% has only been passed on by 0.10% by the banks but only to mortgages.

Since interest rates started diving late last year, mortgage interest rates have followed them down but credit card interest rates have not – not the full 4.25% anyway. When rates go up, credit card rates increase immediately (or usually the next statement period). When they go down, credit card rates either take months to come down or are only reduced partially.

A few years ago, you could get credit cards with interest rates as low as 8.99%. Many were at 9.99%, a few just over 10%. These were called low rate cards and offered no so called “complimentary” services, and usually had a higher annual fee. Such cards were good for dumping grounds of unsecured debt at a low rate. In many cases, interest rates on personal loans were higher – a credit card was the better option. Back then, the Reserve bank interest rate was about 5 or 6%. Then there were the premium credit cards, with interest rates ranging from 14-21%.

Now, these same “low rate” credit cards have interest rates as high as 15.99% (HSBC low rate VISA). This card I draw particular attention to as it started off as a 9.99% low rate card. Its interest rate went up with each increase in central interest rates, but never came down again. Both BankWest and St George offered a card with 8.99% interest. Now they are at 11.89 and 11.39% respectively. Most of the other low rate cards – including many that started at 9.99% a few years ago – have settled around 11.75%, after peaking around 13% last year. GE Money’s low rate credit card is still at 14.99%. Used to be around 10% but has never gone back.

It seems, that the only beneficaries of interest rate changes are the banks. Not the general population. The banks need to be forced to pass on interest rate cuts. If they set the rate of a loan, a credit card, an overdraft, a mortgage, and the like as a specific percentage rate above the central rate, then it should make no difference what the central rate is to their loans. If the rate goes up, put the interest rate of the loan up by the same amount. If it goes down, put it down by the same amount.

It is sad to see, that people with credit card and other debts get little or no relief when interest rates go down. Our media seems obsessed with the central interest rate. A change in the interest rate is always the top news story of the day. The TV networks go live to the announcements at 2.30pm on the first Tuesday of each month. If you have a mortgage – which I know is the mother of all debts – then you get the relief. You have some extra money to spend. But any other debt, makes no difference to you. And if you rent on top of that, then your situation is as bad as ever.

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