How Bad Are Default Rates Getting On Credit Card Portfolios

Creditmart.com.au has recently analysed 115 credit card offers within the Australian market to view how the interest rates have changed, if at all, between September 2008 and May 2009. Over the same period the RBA has reduced the official cash rate by 4.25%, so have credit cards followed suit?

The answer is a resounding no. Over the same period the average fall in the purchase interest rate was 0.7% and the cash advance rate fell on average by 0.3%. Of the 115 credit cards analysed, 59 reduced their purchase rate, 8 increased it and 48 remained constant.

When looking at the cash advance interest rate we saw 47 offers reduce rates, 49 with no change, 11 increased the cash rate and 6 offers removed cash advances all together.

Managing Director of CreditMart.com.au , Shane Stocks said he was not surprised by the results as 9 months ago they had predicted cash advance rates would not move to the same degree as purchase rates.

“The results clearly indicate the banks are concerned with default rates in their portfolio’s. Cash advances on cards have long been seen as higher risk so the bank certainly won’t be encouraging their customers to take out cash, therefore they will keep the rates high. A key component in setting interest rates is perceived risk, so if the default risk associated with their card portfolios is increasing, any reduction in the official cash rate will be negated by the increase in defaults. The end result, purchase rates not falling to the same degree as the official cash rate, which is what we have seen

About the author

This article was written by Shane Stocks for Creditmart.com.au. CreditMart.com.au is a financial comparison portal comparing hundreds of credit cards, home loans, personal loans savings accounts and car loans. We have a wide range of search tools as we as special offers Australian financial institutions.

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