Government reforms crack down on credit cards

Posted: 1 January 2019 11:00 am

It will be easier to cancel your account but harder to access higher credit limits from today.

The Australian government's crackdown on credit cards kicks off today. Designed to protect consumers and promote responsible credit card lending, the government introduced the first of the reforms, a ban on credit limit increase invitations, in July 2018. However, the three major changes rolling out in 2019 include:

  1. Stricter credit limit assessments
  2. Online credit card cancellations
  3. Ban on backdated interest charges

While most of these initiatives are intended to help cardholders, it's important to understand what they mean and how they will impact how you can use your credit card.

Here we'll give you a rundown of the changes that apply from 1 January 2019 and how they'll impact how much credit you can access and why your credit score is more important than ever.

Credit card limit assessments

When you apply for a credit card or request a credit limit increase, the card issuer must assess your application based on your ability to repay the entire credit limit within a three-year period. The calculations assume that your balance is collecting interest at the highest rate applicable under the contract.

These stricter credit assessments are designed to help prevent cardholders from accessing credit limits that could lead to unmanageable debt and high interest costs. However, it also means that you're likely to be approved for a lower credit limit than you may have received in the past.

If you're concerned about your credit card limit assessment, you can order a free copy of your credit report and score through Finder to review your financial history and understand your current position. This will also give you the opportunity to correct any mistakes on your file that could affect the result.

How will this impact future balance transfers?

The new credit limit assessment process is especially important if you're moving a debt from one card to another to take advantage of a balance transfer promotion.

The credit limit assessment takes into consideration your existing cards and issuers are required to assume that you're making repayments that would allow you to pay off each credit limit within a three-year period. If you have one or multiple credit cards with a high limit, these calculations could restrict the credit limit you're offered on a new balance transfer card.

This is important to remember given the transfer limits that are imposed with most balance transfer cards. You can only transfer up to a percentage of your approved credit limit (which can range from 70–100% of the limit). As credit limits are tightened, you could potentially have trouble transferring the entire debt to a new balance transfer credit card. This means that a portion of your debt could remain in your old account subject to collecting interest.

This is especially important to consider in the post-Christmas period when many Aussies are conducting balance transfers to manage their debt. According to Finder's analysis of the RBA forecast data, Australians likely spent more than $29 billion on their credit cards in December 2018. This is a steady increase from the last 3 years ($27.5 billion in December 2015, $27.7 billion in December 2016 and $27.9 billion in December 2017).

You can learn more about how the new credit limit rules could impact your balance transfer in this guide.

Online card cancellations

The reforms will also make it easier for cardholders to cancel their accounts or reduce their credit limits online. After a customer makes a request to close their account or lower their limit, the issuer must take reasonable steps to help the customer meet their request. This means that credit card companies can no longer make contrary suggestions (such as keeping your product or switching to another) when you're trying to close your account or cut back your credit limit.

Considering many banks insisted that cardholders had to close their accounts over the phone or in-branch, this will make it easier for cardholders to manage their accounts. This reform does not apply to exisiting credit card contracts, only to those commencing from 1 January 2019.

Ban on backdated interest charges

Credit card issuers can't retroactively charge interest on balances from today. This will impact the interest-free days feature offered by many cards. Prior to today, if you didn't pay the full amount listed by the due date on your statement, interest would be backdated based on when purchases were made. This reform applies to existing credit card contracts, but only to purchases made from today.

As well as these reforms and following a prompt from ASIC, nine of Australia's biggest banks and credit issuers have also committed to more-responsible lending habits in 2019. These include employing measures to prevent problematic debt, restricting the amount by which cardholders can exceed their credit limit and providing more education around balance transfers.

You can learn more about these changes in our guide to how the new credit card reforms will impact you.

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