Credit Card Holders Still Face High Interest Rate Charge on UnpaidBalance - CHOICE # 439

Credit card interest rates have remained unchanged at a high level, of mostly 30% upwards, despite the prolonged continuously low interest rate environment.

The latest Consumer Council survey on credit card charges showed that hard-pressed cardholders were subjected to continued high interest rates on unpaid balance since a similar Council survey three years ago in 2010.

Credit card market penetration and usage is very high in Hong Kong. According to statistics available, more than 17 million credit cards are current in circulation in the market. Based on a total population of 7.17 million, every person in Hong Kong owns, on average, 2.4 credit cards.

The survey focused on the products of 20 credit card issuers, covering their charges and related APR - Annualized Percentage Rate. APR is a reference rate which takes into account of the interest rate and other fees and charges (such as administrative cost) expressed as an annualized rate. APR is normally used to demonstrate to consumers the actual cost of credit.

As revealed in the latest survey credit card interest rates on unpaid balance were practically unchanged at their previous high levels; adjustments, if any with some moving even upwards, were of a minimal magnitude of less than 1%.

For instance, for cash advance with credit cards, the interest charge between this year (20.39% - 37.14%) and 2010 (20.62% - 37.49%) showed a slight decline.

But the default charge for cash advance between these two corresponding periods, (39.42% - 47.36%) and (38.70% - 47.09%) respectively, increased slightly. The comparison is based on the default charge collected from the 12 card issuers which raised the interest in default payment, in the two surveys.

The survey found a wide interest rate disparity (8.75% - 34.49%) for retail purchases - interest charge is imposed if cardholders fail to pay off the balance in full each month. But it turned out that an overwhelming majority (18 out of 20 card issuers) were charging interest rates of 30% and more.

Interest rates on unpaid balance may vary among individual cardholders of the same card company. This is because some card issuers set their interest rates based on a customer's credit history and financial situation. This means that those with a poor credit history and financial situation are generally charged a higher interest rate, and vice versa.

Cardholders are strongly advised to exercise extreme caution to avoid getting into debt with card companies.

Besides the usual high interest rate for unpaid balance, there might be extra charges if you are in arrears with your monthly payments.

In the case of default charge for cash advance, for instance, the survey showed that 12 out of the 20 card issuers raised the annual interest rate further by 3.31% to as much as 24.12%.

Furthermore, card companies may charge if you are late paying your bill or spend beyond your credit limit.

According to the survey, the late charge is generally calculated at 5% of the minimum payment due, from a minimum of $130 to a maximum of $350, while the overlimit charge is from $90 to $200, the most common being $180. According to the enhanced credit card practices implemented by Hong Kong Monetary Authority and the Hong Kong Association of Banks, in cases of minor breach of credit card terms, card issuers would exercise their discretion to reduce the relevant fees. Consumers are therefore advised to explore with card issuer if the fees involved can be waived/deducted.

To drive home the severity of the high cost of credit card interest on unpaid balance of retail purchases, the survey illustrated with an example of $50,000, and that minimum payment is not paid on or before the due date for three consecutive months.

With an annual rate of 30% (the most commonly levied), the interest could accumulate, with compounded effect, from $1,247.68 to $2,526.50 then to a total of $3,837.23 in three months.

The survey also looked into the chargeback protection for credit card payment in the event of shop closure. The result showed that for consumers to enjoy chargeback protection, certain requirements had to be met.

In terms of chargeback for lump sum payment upfront, among the 20 surveyed credit card issuers, 6 claimed that they offered chargeback protection, 8 would handle chargeback applications on a case by case basis, the remaining 6 would only follow up doubtful transactions with receiving banks or handle the applications in accordance with the rules of international credit card associations.

In the case of instalment payments by credit cards, with the exception of 4 credit card issuers which do not offer credit card instalment programmes, the survey found 12 card issuers to simply treat a credit card instalment programme as a loan agreement and as such will not provide chargeback protection to consumers. 2 card issuers would handle chargeback applications on a case by case basis. The remaining 2 would handle them but final arrangement would be subject to the rules of international credit card associations.

According to the survey, card companies generally allowed an interest-free period of 52 to 90 days but this benefit would cease when the account carried an unpaid balance from the previous month. Only 2 card issues surveyed would continue to provide interest-free period for new transactions the cardholders made with their cards with a balance still outstanding.

The survey also covered charges of annual fees for different card types ($600 - $1,800 for platinum; $250 - $680 for gold; $220 - $300 for classic), and card reward programmes details (mostly offering cash rebate from 0.4% to 1.2% and redemption period generally from 1 to 5 years).

Consumer complaints involving credit card service rose from 272 cases in 2011 to 306 cases last year, up 12.5%. In the first quarter of this year, the Council received 71 complaints relating mostly to disputes over charges and gifts for new cardholders.

Prospective and current credit cardholders are urged to consult the survey report, published in this May (439) issue of CHOICE, for comparison of details of charges of the 20 credit card issuers, as well as advice and guidance on the prudential use of credit cards.