Research conducted by Virgin Money has highlighted a number of credit-card interest-rate “secrets” that South African banks would prefer their consumers not know about, resulting in a pretty dreadful deal for consumers when it comes to the interest rates they receive and are charged on their credit cards.
The major finding of the research is that when interest rates rise, credit-card issuers are quick to increase negative-balance interest rates automatically, but slyly do not pass on any or all of the benefits of rate increases to cardholders with positive balances.
‘Banks are having their cake and eating it too when it comes to credit-card holders and their interest rates. When you make the most of the credit offered by them, they sting you with huge interest rates — but if you decide to save, they believe the same generous interest-rate rules shouldn’t apply,” says Gavin Muller, of Virgin Money.
Virgin Money carried out the investigation by comparing both the credit (positive balance) and debit (negative balance) interest rates of eight of the most popular South African credit cards. In the interest of transparency, calculations were based on an average for both positive and negative balances of R6 000.
‘The results of the research clearly illustrate a lack of transparency on the part of banks with regards to credit-card interest rates. Consumers need to be aware that not every credit card is the same and that they must shop around to ensure that they are not topping up their banks profits,” Muller says.
Secret #1: Banks don’t pass on all the benefits of repo-rate increases
The research found that while credit-card issuers are very quick to up their credit cards’ negative interest rates after any repo-rate increase, they certainly are not as eager to pass the benefits of the increase on to cardholders with positive balances.
In fact, very few banks actually link their positive-balance interest rate to the repo rate, thus making any increase a very profitable win-win situation for the banks — and a very painful lose-lose for their unlucky credit-card customers.
Secret #2: Low interest rates for positive balances
The second secret kept from South African consumers is the fact that the banks offer horrendously low interest rates on positive balances, which begs the question: Where is the incentive for consumers to save money?
The research found that the average interest rate on a positive balance of R6 000 for a credit card is 2,72%. In one instance, the positive interest rate was as low as 0,25%, which is really quite pitiful. On a balance of R6 000, this equates to R1,25 of interest earned a month — not even enough to buy a loaf of bread!
Secret #3: It seems your bank only cares about you if you’re wealthy
Again, another case of credit-card issuers ensuring that the interest-rate “rules” they apply only benefit themselves. Their negative interest rates kick in from the very first rand, and stay the same no matter how small or large a balance — but with any positive balance it’s a very different story.
These are tiered, which means cardholders only benefit from the so-called “higher” positive interest rates when they deposit hefty amounts of cash. So one has to be pretty rich to benefit from — in the words of one of the larger banks — a “generous interest rate” of 4,25%, due to the fact that cardholders needed to have a positive balance of R100 000 or more!
Secret #4: Credit-card issuers lack transparency with interest rates
During its research, Virgin Money experienced considerable difficulty in finding out what certain credit-card issuers’ interest rates were, because this information was either hidden away on the remotest pages of their websites, or not immediately available — even to their call-centre staff.
This is despite the recent implementation of the National Credit Act, developed to allow consumers to make informed decisions about credit by making all the relevant information easily accessible and understandable.
Some credit-card issuers also make it very complicated for consumers to ascertain what interest rates they offer, unless they go through a lengthy, formal application process.
Make your credit-card issuer sweat!
If you really want to make your credit-card issuer to sweat and work hard for your business, Virgin Money suggests you make sure to ask the following questions:
What is the interest rate that it levies for negative balances?
What interest rate does it offer for positive balances?
Are these positive interest rates tiered based on the amount of money deposited?
If the repo rate changes, does it pass on the full benefits of a higher interest rate for a positive balance?
How many times has it increased its negative-balance interest rate when the repo rate increased, but never bothered to increase the interest rate by the same amount for positive balances?
When you apply for a credit card, can you easily find all the information on its website or through its call centre that you require to make an informed decision?