Banks pressured to enforce stricter credit card rules

Sally McMullen 10 May 2016

big 4 banks

Banks may be forced to impose more thorough applicant checks and lending criteria following a Senate inquiry. 

Following several Senate inquiries into credit cards over the last 12 months, the Federal government may be forcing banks to introduce stricter responsible lending obligations to ensure customers can afford the card before they receive approval. In the last year, banks have been accused of profiting on customer inattention and approving applicants who can’t afford to repay their loans. As such, the government has vowed to crackdown on banks to follow more ethical lending processes.

On Friday 6 May, the government showed support for eight of 12 recommendations brought up in the Senate inquiry. Here, we’ve unpacked some of the major proposed changes to see how this could impact the credit cards you’re eligible for and how you can protect your finances when comparing credit cards.

What are the proposed changes?

Some of the major proposed changes included enforcing stricter eligibility requirements, increasing communication between customers and the banks as well as changing the process around minimum repayments. It’s unclear as to when these changes will be introduced, so what can you do to protect your finances in the mean time?

Stricter eligibility requirements and approval process

Banks have come under fire for using flippant approval processes that allow ineligible applicants to access credit cards in the last year. Instead, the federal government is pushing for stricter eligibility requirements (such as income and credit history) and more thorough assessments of the applicant’s ability to repay within a reasonable time.

  • What can I do?

While a credit card can give you financial freedom, it will end up being more of a burden if you can’t afford to make regular repayments. Even if you technically meet the eligibility requirements, calculate whether you can afford both your everyday costs as well as credit card costs if you’re approved. It’s also important to remember that your debt will grow with interest if you’re unable to pay your balance in full.

If you realise that you can’t afford both your necessary everyday costs and the credit card, look for a card with a low credit limit (to curb overspending), or a 0% balance transfer or 0% purchase credit card to limit your interest costs.

Increased customer communication

Banks have also been accused of capitalising on customer inattention, so another proposed outcome is increased communication between the bank and the cardholder. For example, the Senate inquiry suggested that banks could make reasonable attempts to contact customers when their balance transfer periods were coming to an end, especially if they were still carrying a debt. Banks would also be responsible for initiating a discussion about the state of their current credit card and providing advice on alternative products if the cardholder is unlikely to repay the balance before the offer ends.

The government has supported these proposals, suggesting that card issuers could send electronic notifications to cardholders who have outstanding balances.

  • What can I do?

Rather than waiting for the bank to contact you, you can take some initiative and set yourself reminders. Use your phone, computer or diary to set reminders to make repayments and to notify you of how long you have until the offer ends. Within these reminders, you could also list how much you have to pay and how much debt you have remaining to help you keep your payments on track.

Minimum repayments

When you apply for a credit card, your card provider usually stipulates a minimum repayment that you must pay each month. If you only meet the minimum repayment, though, you’re unlikely to repay your entire balance quickly. If your card has a 0% balance transfer or purchases offer, it’s especially important to pay more than the minimum repayment to ensure you repay your balance before the higher revert rate kicks in when the promotion ends.

As such, the Senate inquiry is keen on raising minimum repayments to help users consolidate their debts faster. The government is also keen to see if issuers can provide options for customers to pay set higher repayments each statement period, hopefully curbing the number of cardholders struggling to repay their debt in the long run.

  • What can I do?

While you must at least meet the minimum requirement, there’s nothing stopping you from paying more. If your card has a low balance transfer or purchases offer or if you have a personal financial goal you’d like to meet, calculate how much you’ll need to pay each week or month to completely repay your balance by a set date.

If you set your own minimum repayment, it’ll be easier to stick to a budget and will lessen your chances of slipping into debt. Plus, if you have to make a smaller payment one month, you’ll know exactly how much more you need to pay to make up for it the next month. This may mean that you’re paying more upfront, but you’ll make larger savings in the form of interest in the long run.

While the proposed changes from the Senate inquiry could result in more ethical lending practices and greater communication between banks and customers, you don’t have to wait until they are enforced to take control of your finances. Now that you’re aware of some of the ways you may have been blindsided by the banks, you can make these small changes to make more conscious decisions when it comes to managing your credit card.

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