We owe $45 billion on our credit cards and it's not getting better
4 July 2018
Canberra Times
As the nation's credit card balance heads towards $50 billion, the corporate regulator has warned that tighter rules are needed over who can get one with almost one-in-five card holders already struggling to cope with their debt.
The Australian Securities and Investments Commission (ASIC) will release a major review of the credit card market on Wednesday which finds almost 2 million people - or 18.5 per cent of card holders - exhibit at least one "problematic debt indicator" such as being in arrears on their repayments or never being able to clear the debt.
They can be a 'debt trap' for many of these cardholders, the regulator said, noting that 12.3 million Australians have at least one credit card.
Peter Kell, ASIC's deputy chairman, said only a handful of credit providers take proactive steps to address persistent debt, low repayments or poorly suited credit cards and more action would be needed.
"There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings," Mr Kell said.
"We will be following up to ensure the problems we have identified are addressed."
ASIC proposed the establishment of responsible lending assessments for credit cards be based on whether the consumer can afford to repay the credit limit within three years.
There's a trap with it, if you don't stop using the first credit card, you'll end up doubling the debt.
The purpose of the proposed reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period.
The new reform would apply to to both new and existing credit card contracts from January 1, 2019. ASIC will make a final decision about the proposed three-year period following an industry consultation process, which ends on July 31 this year.
The report takes aim at balance transfer cards for keeping some consumers in constant debt and is proposing consumer's capacity to repay credit card debt be assessed by lenders before issuing a card to a consumer.
Balance transfer cards are where a balance from another card is transferred to new 'balance transfer' card where there is no interest on the debt that is transferred for periods of up to two years.
It is only interest free on the original transferred debt. Any transferred debt not paid off in full by the end of the zero interest period, as well as new purchases, will attract a high rate of interest.
David Welch, from the Latrobe Valley in Victoria, had a credit card debt with a big bank five years ago that he transferred to a card with another major bank with an interest-free period of 12 months.
"It was temporary financial relief. It solved a short-term problem, but created a long-term one," the 58-year-old manager of a welfare agency said. He now owes about $33,000 across both of his cards, or about twice the original debt.
"There's a trap with it, if you don't stop using the first credit card, you'll end up doubling the debt," he said.
Law firm Slater and Gordon is investigating the potential for a class action with more than 100,000 customers duped into paying over $40 million for "worthless" credit card insurance.
He plans to pay-off this debt gradually, using windfalls like tax-return refunds and to moderate his spending.
"I think that checks on capacity to repay should be more stringent, and greater stringency on how you can get credit cards and what you can do with them. Back then it was too easy to apply online and get them," he said.
Consumer advocates have long pointed out that some of these cards have annual fees and those that don't tend to have a'balance transfer' fee that can be as much as 3 per cent of the debt transferred, which can be a real sting if thousands of dollars are transferred.
An interest-free card with a high annual fee could actually end up being more expensive over the long-term than a card with a low-rate and no annual fee.
ASIC said while many consumers reduce their credit card debt during the transfer card's promotional period of zero or low interest rates it finds it "concerning" that more than 30 per cent of consumers increase their debt by 10 per cent or more after transferring a balance.
Australians pay more than $5 billion a year in interest on credit-card debt of which the regulator estimates $621 million in interest would have been saved in 2016–17 if they had carried their balance on a card with a lower interest rate.
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