Australian outstanding credit card debt reaches almost $45 billion
More than 1 in 6 Australians are struggling with credit card debt, reveals ASIC’s review of credit cards.
Outstanding credit card debt has hit almost $45 billion according to a new report from the Australian Securities & Investments Commission (ASIC). Looking at 21.4 million credit card accounts open between July 2012 and June 2017, ASIC’s review into the credit card market also reveals that 18.5% of credit card customers are struggling with credit card debt.
Overall, the review of credit card lending focused on three key areas: credit debt and consumer outcomes, the effect of balance transfers and tailored rules that apply to credit cards.
In June 2017 there were almost 550,000 people with outstanding debt, 930,000 with “persistent debt” and another 435,000 people repeatedly repaying small amounts.
ASIC attributes some of this to Australians getting credit cards that don’t suit their needs. For example, ASIC estimates that cardholders carrying high-interest debts could have saved around $621 million in interest costs over 2016–17 if they had used a card with a low interest rate. While some cards offer 0% interest for promotional periods, cards with interest rates between 9.99% p.a. and 15% are considered low rate options.
ASIC also believes that credit issuers need to do more to assess a customer’s ability to repay the debt to ensure responsible lending. To support this, ASIC has issued a responsible lending assessment consultation paper today.
This is designed to prevent unsuitable lending to ensure that consumers can afford to repay their credit card debts within a set period while still giving Australians reasonable access to credit. The closing date for submissions is 31 July 2018 and will be rolled out as a credit card reform from 1 January 2019.
This will join other government implemented strategies including the banning of unsolicited credit limit increase invitations (which rolled out from 1 July 2018) and making it easier for consumers to cancel credit cards online (which will be implemented in January 2019).
The impact of balance transfers
ASIC's recent report also reviewed balance transfer credit cards. According to the report, the data shows that while many consumers pay down their debt during the promotional interest-free period, over 30% of consumers increase their debt by 10% or more after transferring a balance. This is because consumers aren’t paying off their debts by the end of the introductory period, subsequently collecting the cash advance interest rate and slipping back into debt.
A 0% balance transfer credit card can be a great way to consolidate and clear your debt, but only if used properly. Before you apply for a balance transfer deal, you should determine how much you need to pay each statement period to clear the debt before you start collecting interest. If you don't think you can afford this, you might want to consider a card with a longer interest-free period to spread out your repayments and avoid collecting interest. You can use the repayment calculator on finder to calculate how much you'd need to pay each month to clear your debt by your goal date.
Although credit card holders are still struggling to pay their debts, ASIC found that the credit card repayment rules enforced in 2012 have had a positive impact. This ensures that credit issuers are assigning repayments towards the debt that’s collecting the highest interest rate first. However, Citi, Latitude, American Express and Macquarie were still applying the old credit card repayment rules to credit cards opened before June 2012. ASIC estimates that almost 525,000 consumers have paid more interest on their credit card debts as a result. To prepare for the new Banking Code of Practice, Citi and Macquarie will no longer implement this repayment allocation strategy from 2019.
Although credit cards can be a useful way to free up your cash flow and provide financial flexibility, there are risks when paying on plastic. Cardholders should research their options before applying for a credit card to ensure they can afford the product without falling into debt. However, as highlighted by ASIC's review, it's also the credit issuers' duty to practice responsible lending.
Fingers crossed that the 2018-19 credit card reforms and upcoming new Banking Code of Practice will foster more ethical lending behaviours to help Aussies better manage their credit card debt.
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