A proposal to prevent credit cards becoming a lifelong debt sentence has been welcomed by Consumer Action Law Centre.
The Australian Securities & Investment Commission (ASIC) has released its proposal together with a new report examining credit card lending in Australia. The report finds that credit card debt is causing problems for at least 1.9 million Australian credit card holders.
“Credit card debt is a key reason people call our National Debt Helpline” said Consumer Action CEO Gerard Brody. “Lenders have assessed people based on their ability to meet minimum monthly payments or a small amount above this. This means that they can be stuck with expensive debt for decades”.
Echoing concerns raised by Consumer Action, the ASIC report also found that ‘balance transfer’ cards can be a debt trap, finding:
Over 30 percent of people who chose a balance transfer increased their debt by more than 10 percent during a promotional period;
Around 15 percent of people’s credit card debt increased by more than 50 percent; and
Only 8 percent of people were able to take advantage of a promotional period by paying of their debt entirely.
“Lenders market balance transfer cards as a debt solution”, said Mr Brody. “However, the data shows these cards in fact can result in increased debt. This means that they’re unsuitable for many”.
Consumer Action welcomed the proposal to set maximum credit card limits at an amount that can be affordably repaid over three years.
“Credit cards should not be a long-term debt sentence”, said Mr Brody. “We consider that if you can’t afford to repay a limit over two years, then it’s not an appropriate product for you. However, the three-year proposal by ASIC is a step in the right direction”.
Other findings of the ASIC report include:
High-interest cards can be unsuitable: Consumers on high-interest rates could have saved at least $621.5 million if they were charged at lower interest. It’s highly unlikely whether the ‘benefits’ of a high-interest card would’ve provided that much value.
Over ten percent of credit card customers were repeatedly going over their credit limit. A credit limit should be just that; you shouldn’t be able to exceed a limit and go further into debt.
Four providers – Amex, Citi, Macquarie and Latitude – continue to impose tricky repayment practices. In 2012, the law was reformed so that repayments on new cards were directed to higher-interest balance first. These four providers have not applied the fairer rules to old customers, meaning over half a million customers are charged higher interest amounts.