How the new credit card rules will affect you

From 1 January 2019, new credit limits will be based on what you can afford to pay off over a three-year period.

The new regulation, announced by ASIC on 5 September 2018, aims to help reduce debt traps when you apply for a new credit card or credit limit increase. As well as considering your income, the three-year period must factor in the card’s fees and the highest applicable interest rate, which is usually the cash advance rate. It also has to consider the potential costs you’ll face from other cards or loans.

To see how this might play out, say you could afford to put $250 towards credit card debt each month. If you applied for a credit card with an interest rate of 19.99% p.a., you could get a credit limit of up to $6,720. This is based on results from the credit card repayment calculator, which shows it would take just under three years (35.94 months) to pay off the $6,720 balance in this scenario.

If the card had an annual fee, or if you have other debts, then the limit you’re offered could be lower. On the flip side, if you could afford to pay more off your card each month, the limit could be higher.

Below are a few other points to keep in mind if you apply for a credit card or credit limit increase from 1 January 2019.

You can still choose how much you repay

Keep in mind that the new credit limit assessment is only based on what you could afford to pay off over three years. It doesn’t mean you have to pay that much each month.

If you really wanted, you could pay just the minimum amount listed on your statement. Although, even with this flexibility, it would still be more affordable to clear your whole balance each month.

Balance transfers may be more restricted

Many 0% p.a. balance transfer credit cards include a maximum transfer amount that is based on your credit limit. For example, you might be able to move debt worth up to 80% of your available credit limit on the new card.

When the three-year assessment comes into effect, it could be harder to get a credit limit that allows you to balance transfer your entire debt. For example, if you had a $5,000 debt you wanted to move to a new card but were only offered a $4,000 credit limit, you could end up carrying a balance on both the old card and the new card. There are other ways this scenario could play out, but it basically means you may have to pay off some of your debt at a high interest rate before you can transfer it to a card with an introductory 0% p.a. interest rate.

If you get a balance transfer card with a credit limit that doesn't cover your entire debt, another option is to use a personal loan to pay off the remaining debt. This could help you save on the interest charges applied by your existing card, as personal loans typically have more competitive rates than most credit cards (outside of introductory periods).

Your current credit card will affect the limit you get on a new one

If you have a number of credit cards, or even just one with a high credit limit, issuers will have to consider this when deciding on a credit limit for new cards. This could make it harder to switch between cards because, theoretically, each new card would have a lower credit limit while you still kept the others.

Ultimately, that’s a smart way to cut down on accounts you don’t need. But it could be frustrating if you want to take advantage of introductory bonus point offers or 0% p.a. interest rates. It could also have implications for cards with high minimum credit limits as your application will need to show you could pay off at least the minimum limit within three years.

Credit limit requests could become more common

Currently, it is really easy to go along with the credit limit suggested by a new issuer. But if you want a balance transfer in the future, or you're after some frequent flyer bonus points, then you might have to compromise on your ideal credit limit somewhere along the line.

For example, if you currently have a card with a credit limit that you could not pay off in three years, it might be a good idea to request a lower limit before applying for a new card. Or, you could apply for a new card with a low limit, then cancel the old card and wait a few months before submitting a credit limit increase that suits your spending habits.

Overall, this change is a big step in the right direction when it comes to cutting down on serious credit card debt. But it does have the potential to change how and when we apply for cards – particularly those with balance transfer or bonus point offers. As a result, being more selective about which card (or cards) you apply for in 2019 should help you find one that balances features with affordability.
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