Credit card interest rates will continue to rise despite a drop in the official cash rate, according to research firm Canstar, spelling bad news for start-ups planning to spend on credit this year.
Canstar says while individual cards may have passed on recent interest rate cuts, the overall market hasn’t shifted since the onset of the global financial crisis in 2008.
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“When official interest rates peaked at 7.25% in late 2008, premium and gold credit cards averaged 18.72%,” Canstar financial analyst Adam Beu says.
“Fast forward to December last year when the cash rate was 4.5% and we note the average for premium and gold cards has crept up to 19%.”
According to Canstar, the figures reinforce the fact that lenders are determined to retain a certain profit margin, even when official rates are on the slide.
The best thing you can do, Canstar says, is to pay down or pay off your credit card and use it sparingly during these uncertain times. This is particularly important for new businesses.
“If you’re going for a balance transfer, try to avoid any spending on the card. Not only does it get charged at a higher rate, they generally charge interest from day one,” Beu says.
“The key to making a balance transfer offer work to its maximum for you is to avoid any spending on the card until you have paid off the balance in full.”
According to Beu, it is essential to find out how the repayments are allocated in a balance transfer offer.
“Avoid cash advances as well, generally. Sometimes, the cash advance rate is a couple of percentage points higher than the purchase rate,” he says.
Beu says while credit card interest rates show no sign of slowing down, that doesn’t mean businesses should steer clear of credit cards altogether.
“It doesn’t seem there’s going to be any relief on the cards but we don’t really know what the banks are thinking,” he says.
“[However,] there are 120 credit cards offering balance transfers, ranging from 0% to 8.99% for terms of four to 12 months, so there’s bound to be one that’s right for your situation.”
Beu points out that credit card limits are also on the rise, so businesses need to be careful.
“While credit card balances have been growing slowly, credit card limits have taken off,” he says.
“However, it seems consumers are not maxing out their cards because there is a large level of unused credit just sitting there.”