Why are credit card interest rates so high?

Three things you can do about it

Just in case you missed it, interest rates in NZ are at record lows after steadily sliding downwards for at least the last 10 years, and most analysts predict they will drop further.

This is great news for nearly everyone who’s borrowed or is borrowing money (including those with mortgages who haven’t fixed the term for too long), as they won’t be paying so much in interest. This probably means they have choices such as using the extra surplus to increase debt repayments or build up cash reserves.

Despite this, NZ (and global) credit card interest rates remain stubbornly high. Most of the mainstream cards from NZ’s largest banks are still charging around 20% interest every year. So what gives?

Well, there are several reasons commonly cited for the high credit card rates:

• Lending standards are much lower for credit cards. If you apply for a home loan, for instance, a lot more scrutiny is applied.
• The loans are unsecured. If you stop paying your mortgage, the bank can take your home – it’s not as easy if you stop paying down sums owing on a credit card.
• Consumers have all of the power in terms of when and how to use their allotted credit. This means it’s harder for the bank to forecast what you might spend on your card and how much they’ll make in interest etc.
• There is a higher chance of delinquency (failure to repay) with credit cards compared to mortgages and other loans.

Most of these reasons make sense, but this doesn’t tell the whole story. For one thing, the delinquency rates of credit card loans have actually come down a lot in recent years.

The other reason credit card rates remain so high has to do with plain old inertia. The banks have always charged high rates on credit cards, so that’s what they’ve continued to do. Because “that’s the way we’ve always done things” is about as good a reason as any when you’re dealing with entrenched ideas. It may also have something to do with the credit card companies themselves. Visa, Mastercard, and American Express are among the biggest and most powerful companies in the world.

What can you do about it?

There are three broad options available to strike back at the banks and credit card providers.

Which option, or combination of options, you take probably depends on your personal spending habits and situation:

1. If you’re not very disciplined, get rid of all credit cards and pay with your savings instead! Of course, this might take a budgeting overhaul, and perhaps an adjustment to spending habits.
2. Buy Now Pay Later (BNPL) might be a good credit card alternative. BNPL systems allow consumers to purchase and obtain goods and services instore or online immediately, then pay for the purchase over time. It’s a relatively new concept in NZ. BNPL differs from familiar concepts such as traditional laybuy, where the item is held by the store until it’s paid in full. With BNPL, the consumer takes the item away after leaving a small deposit, then pays the remainder of the original price over a set period of time, with no interest. While an attractive feature of BNPL is no interest charges, there will be penalty fees for late payments and a few other fees to be aware of. Four companies - Afterpay, Oxipay, PartPay and Laybuy - are the most well-known providers starting to make their mark on the NZ market.
3. If you’re disciplined, get a credit card with a good rewards or cash-back scheme and repay your credit card in full during the card’s interest free period. By channelling well-disciplined spending through the credit card, you won’t pay a cent in interest, and will start to accrue plenty of rewards. You might just pay an annual credit card fee of $100 or so.