Ask Credit Card Finder: How will the new credit limit rules affect retirees?
Credit limits are now determined based on your ability to repay them over three years. So what does this mean for retirees and people on pensions?
I've been reading the interesting information Finder has on the credit card reforms and I'm wondering what kind of impact the credit limit changes will have for retirees. Is it just about income? What about if you have decades of history showing that you have always made repayments on time? Just because you're not earning a salary doesn't mean you can't service a credit card account.
You've raised a really important point about the impact these changes could have when you're retired – a perspective I haven't seen addressed in detail. So, let's discuss it now.
As the new assessment process is focused on whether you can repay the entire credit limit within three years, your income is a major factor.
However, that doesn't have to be from a salary. If you're retired, card providers will also consider your regular superannuation and pension payments as well as any other assets you have, such as savings or investments.
In fact, ASIC has said that the goal of the new credit limit assessment criteria is not only to help prevent people from ending up in unsuitable contracts but also to ensure we have "reasonable access to credit through credit card contracts".
To put it another way, this change isn't designed to cut you off when your circumstances change – including when you retire. Instead, it's meant to help make sure the credit limit you have is manageable over a three-year period, based on a whole range of factors.
Besides your income (from various sources), these factors include the following:
- The card's highest interest rate. Credit card providers must assume the card's highest interest rate is being charged on the credit limit to determine what you can reasonably pay off over a three-year period. This means it could be possible to get a higher credit limit on a low rate card compared to one with high rates, although it does depend on the highest rate charged (which is usually the cash advance rate).
- The annual fee. ASIC has recommended that credit card providers factor in any fees that would "significantly affect" how long it takes for you to pay off the limit. So, if you had an annual fee of $250, for example, it could be part of the assessment.
- Other credit cards. If you have other card accounts, providers will assume you're making repayments that would allow you to pay off the full limit (with interest) within three years. So the credit limits of your other cards will play a big role in determining your credit limit for a new card, as well as any limit increases you request.
- Other financial obligations. Your mortgage or rental payments, other regular bills and your estimated spending on food and other essentials will also factor into the assessment.
As far as your credit history goes, providers may still consider the details there to help them determine what kind of risk is involved in assigning a particular limit.
For example, a provider may offer you a higher credit limit if you have a stellar credit history compared to the limit you'd be offered if there were black marks (such as defaults) in the recent past. The history you have with your current credit card provider can also play a role, so you could contact them directly to discuss your options.
To some degree, credit card providers have considered all of these factors in their credit assessments before 1 January 2019. The key difference is this three-year repayment window.
But if you can show that you're effectively managing your money in retirement, these changes shouldn't stop you from getting a credit card limit that works for you.
Ask Credit Card Finder is a weekly column written by Finder's credit card expert Amy Bradney-George. All rates and fees are correct at time of publication and we only give general advice.
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