Credit Card Banking Reforms

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Find out about the Credit Card Reform happening 1st July 2012.

2011 saw the Australian government making some sweeping changes to the credit card business in a bid to clean up the industry, and make it fairer for consumers.

In 2012 these changes are set to continue with a range of new reforms scheduled to take effect from July 1st. There are two sets of new rules. The first set relate to all new credit card accounts, whilst the second will be applied to all credit card accounts.

Here's some guidance as to what the new rules are, and more importantly how they'll affect you:

From 1st July 2012 new credit card contracts will have to offer a 'Key Facts' statement with detailed information about promotional periods and interest free days

This is a very simple and easy to understand document which outlines all the important information about your new credit card. It should tell you about interest rates, credit limits, charges and fees in a clear and concise manner so you know exactly what you're getting yourself in for. From July, lenders will need to be totally transparent in regards to how long the promotional period lasts, what interest rate the consumer will pay during the said promotional period, and what the rate will revert to once the period is over. This will give consumers the chance to make far more informed decisions about where to open a credit card account.

Implications forThe goodThe not so good
ConsumersConsumers will be able to make an informed decision based on easy to understand credit card 'key facts'. Further information about promotional periods will give consumers a greater understanding of how to maximise their interest free days.There may be a little extra paperwork for applicants when signing up for a card.
LendersStronger products will be more attractive to consumers.Changing the way information is presented to the consumer will require a system upgrade to redesign business to customer communications.

Ban over-limit fees & inform you when you're over-limit

Lenders will no longer be able to charge you a fee for going above your agreed credit limit, unless you give them explicit permission to do so when you sign up for your account. They'll also have to be much clearer about any administration fees or charges customers may be liable for.

At the moment your lender is under no obligation to let you know when you've overspent. This can lead to accidental over use resulting in spiralling debts. From July, the minute you go over your agreed credit limit your lender will be obliged to contact you.

Implications forThe goodThe not so good
ConsumersCardholders will not be charged for spending over their approved credit limit.In case of emergency or unexpected expenses, consumers may have limited access to credit if they are near their approved credit limit.
LendersCardholders that have greater control over their finances may feel empowered to try new products.There will be a reduction in the revenue lenders are earning from over-limit fees.

Allow you to pay the most expensive debt first

Up until now credit card providers would apply any payments you make to the parts of your debt being charged at the lowest rate of interest.

For example, any special promotional balance transfer debt would have been paid first; meaning debt you'd accrued at high rates of interest would have longer to make them a profit. This reform is much fairer and gives consumers a far better chance to reduce their debts faster.

Implications forThe goodThe not so good
ConsumersConsumers with a balance charged at different rates of interest will see a reduction in their repayments and the time it takes them to pay off their card.
LendersConsumers may change their attitudes towards certain lenders with their implementation of a 'fairer banking system'.Lenders will need to update their systems for allocating repayments to credit cards. The loss in revenue may also see a change in offers for certain products.

From 1st July 2012 all credit card contracts will have to ban unsolicited credit limit increase offers

Unless you give your lender permission to send out credit limit increase offers, these communications from your lender will be banned. This will help those who are easily led into temptation steer clear of trouble. You'll be in total control of your credit limit and will even be able to ask for a limit reduction if you think it helps you stay out of debt.

Implications forThe goodThe not so good
ConsumersConsumers will no longer receive offers for credit limit increases that they do not want.People who do want to be contacted about credit limit increase offers will have to contact their lender and 'opt-in' to receiving these offers.
LendersThere will be a saving on card providers direct marketing costs and a reduction in bad debts due to consumers taking on credit that they don't need.Lenders will have to find other means to 'sell credit' to consumers.

Provide you with detailed statements

At the moment most credit card statements give limited information, usually just your outstanding balance, the amount you've spent in that billing period, and your next minimum payment.

Under the new rules card companies will have to offer detailed statements, giving you information such as the amount of interest being charged, and how many years it would take you to repay your balance if you only stick to minimum monthly payments.

This will leave borrowers in a better position to fully understand the extent of their debt.

Implications forThe goodThe not so good
ConsumersCardholders will be fully aware of the implications of making the minimum repayment on their credit card(s) each month.
LendersCardholders that have an understanding of the nature of their debt and an improved sense of financial literacy are less likely to default on credit card repayments.Lenders will receive less revenue from credit card interest charges if customers change their repayment frequency.

When you get your credit card statement it will now show how long it will take to pay off your debit and how much extra interest you will pay if you make the minimum repayments only.

Key Points

  • Credit card statements will show the time it takes to pay off your balance and the total interest payable if only the minimum repayments are made.
  • 13% of Australian credit card users only paid the minimum repayment in 2007.
  • This applies to all credit cards.

It's argued that showing the minimum repayment amount on credit card statements actually makes people pay less of their card. A 2008 study by the University of Warwick, 'The Cost of Anchoring on Credit Card Minimum Repayments', by Dr. Neil Stewart, found that the suggested minimum repayment of two or three percent on their credit card statements lowered the actual payments people were likely to make.

For consumers this is an issue. Only making the minimum repayments on your credit card each month can extend the time it takes you to pay off your card by a lifetime.

What does this mean for you?

These changes will be applied to all credit card statements, so you won't need to open a new account to see the effects of the government reforms.

Included in all future credit card statements will be a 'health warning' which shows what would happen if you stopped adding any extra charges to your credit card and focused on making repayments.

The warning will show how long it takes to pay off your card making the minimum repayments and how much extra interest you're going to incur along the way.

Case Study: Erin, 30. NSW

  • Credit Card Debt: $1000
  • Applicable rate of interest: 19.99% p.a.
  • Minimum Repayment: 2% / $20

Making the minimum repayment

If Erin was to make the minimum repayment of 2% each month, it would take her approx. seven years and nine months to pay off the principle $1000 debt. It will cost her $859 in interest.

Paying an extra $5 a week off your card

If Erin were to increase payments by to $40 a month, it will take her only 2 years and seven months to repay the same debt. Over this time she will incur $239 in interest above of the principle.

By doubling the minimum repayment required by Bankwest, Erin is saving about $620 in interest and cutting the time it takes to pay off her credit card debt by about five years.

Not bad for an extra $5 a week.

Switching your everyday accounts

If you want get yourself a better deal with your transaction account — the account you use for your day-to-day personal banking — there hasn't been a better time. Australian's pay $300 million a year in account keeping fees. But there is no reason you should pay too. There are a variety of no-fee accounts you can switch to. It's time to get yourself a better deal.

From July 1st, you will receive a helping hand from the banks to make it easier to switch transaction accounts. Your old bank must now provide your new bank with a list of regular credits and debits from the past 13 months. Sign a single form and your new bank uses this information to complete the paperwork on your behalf.

Regular bills will be charged to your new account and your regular payments will seamlessly flow from your new account.

Key Points

  • Get the most competitive deal
  • One signature to switch your regular credits and debits transactions to your new bank
  • Save hours of legwork

What does this mean for you?

This means that switching to a new transaction account has never been easier. The banks do the hard legwork and you benefit with a better deal. You have more reason to change and more ease to do so.

Jenny makes the easy switch

Jenny wants to find a better deal on her transaction account. She finds her way to and finds a much better deal. She will save her $60 a year in account-keeping fees alone by switching.

Jenny applies online for the new transaction account. She signs a digital form giving permission for her new bank to find all her regular credits and debits with her existing account and gets a choice of which payments she wants transferred to her new account.

She is advised by her new bank to keep her old account open until she is certain that all her regular credits and debits are transferred over.

Jenny's new bank guides her through the process and she happily finishes the cost-saving transition.

So Jenny, our Finder user, scored herself a winning deal. But what does this mean for our prospects of getting a better deal from our banks?

Keep your old account open with enough money in it to pay incoming bills until you are sure that your payments have been switched over

A new era in banking competition

Banking competition will be more customer-focused than ever. The banks have had their hand forced with consumer-friendly legal changes to the banking industry. A flow-on effect is that consumers will shift to the most competitive deals more than ever simply. Consumers — once shackled but not necessarily loyal — will find that bank competition will become ever more furious as banks must meet their needs to survive. The ultimate winner is yours truly.

Tips to take advantage of the reforms change around direct debits:

  • Go to to compare savings accounts and transaction accounts
  • open your new account
  • ask your bank to transfer your direct credits and debits
  • ask your bank what transactions you will need to manually transfer such as BPAY payments
  • keep your account open until you're sure all your payments have been switched over
  • close your old account to spare yourself needless fees

Switching bank accounts is easy. Don't stay with the bank you've always been with if there is a better account on the market.

What's next?

All of these changes will come into affect during the middle of the year, and whilst many lenders are complaining about being victimised by the Government's stricter stance on lending, surely they only have themselves to blame.

In recent years more and more people have been enticed into debt, and although it's the consumer that goes into a store and pulls out their card, the lenders have to take some of the responsibility themselves.

Tactics such as increasing customers credit limits and offering sudden low rates on purchases do nothing but promote reckless spending, and it's been the tax paying nation who have had to pick up the tab.

Will these new reforms do much to stem the rising credit card debt crisis?

Unfortunately, there will always be those who borrow more than they can afford to pay back, and there will always be those who spend before they think. What these new credit card regulations may do is protect those who do really want to stay out of debt, from the tempting apple of credit.
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