New banking code of practice knuckles down on credit cards

The new code of practice includes responsible lending, stricter credit assessments and easier card cancellations.

The banking code of practice has unveiled its facelift today. The code was revised during 2016-17 and will apply from 1 July 2019. The code of practice includes measures to protect small businesses and consumers and covers everything from credit products to customer complaints.

For credit cards, the major changes concern responsible lending to protect cardholders and to help them manage their accounts. From stricter credit assessments to the end of credit-limit-increase invitations, here’s how the new banking code of practice will impact how you pay on plastic.

Banking code of practice: Summary for credit cards

Responsible lending

The responsible lending reforms aim to protect consumers when they’re applying for credit cards:

Ability to make repayments

The banking code of practice will enforce stricter credit assessments that will consider the consumer’s ability to repay their debt. From July next year, the bank or card issuer will assess your ability to repay the entire debt amount within a five-year period. This is a preventative measure to ensure banks are only lending responsible amounts that cardholders can actually repay without falling into unmanageable debt.

Credit limits

When you apply for a credit card and request a preferred credit limit, the bank will not offer you more than you’ve requested. However, this doesn’t stop you from exceeding your credit limit. Exceeding your credit limit usually incurs a penalty and doesn’t reflect well on your credit history, so keep this in mind when you’re requesting a credit limit.

From 1 July 2019, cardholders can also reduce their credit limit online or over the phone. You can’t request a credit limit that’s lower than the product’s minimum credit limit, and you’re still required to repay any amount above the new limit. Since 1 July 2018, banks are also prohibited from inviting cardholders to increase their credit limit unless the banks are responding to a request from the customer.

Consumer Credit Insurance (CCI)

If you’ve ever applied for a credit card over the phone or in a branch, you may recall being offered consumer credit insurance if your card was approved. CCI is a type of add-on insurance that’s usually sold with credit cards, personal loans and home loans. It’s promoted as a form of financial security if cardholders struggle to meet repayments.

However, the Consumer Credit Insurance Working Group announced a bunch of proposed reforms to protect consumers from unethical CCI practices in August 2017. It turned out that many Australians had applied for a card or loan and agreed to a CCI product without realising what they were signing up for. ASIC also confirmed that consumers can receive very little back in claims compared to what they pay in CCI premiums.

Under the new banking code of practice, banks must give you enough information to make an informed decision when offering CCI. This will include the costs, how long you’re insured for and the monetary limits of the benefits. After you’ve applied for a credit card or personal loan, banks must also wait at least four days before offering CCI. This is referred to as a "deferred sales period".

Managing a credit card

The banking code of practice also includes a number of changes that will help consumers manage their debt after they’ve got their credit card.

Paying your high interest credit card debts first

Banks are required to apply payments to the debts that are collecting the highest interest rates first.

For example, let’s say that your card offers 0% on balance transfers for a promotional period and charges 19.99% p.a. on purchases. If you make a purchase while you’re paying off your balance transfer, your repayments will go towards the purchase first as it’s collecting a higher interest rate than the balance transfer debt. This ensures that cardholders are paying down high interest debts first to help minimise their card costs.

However, cardholders can request to have repayments paid against a specific debt owed if necessary.

Notifications before an introductory balance transfer offer ends

If you’re paying down a debt with an introductory balance transfer offer, the bank will give you at least 30 days' notice before it’s due to finish. This is because at the end of the promotional period, any remaining debt will collect the much higher revert rate.

According to a report from ASIC, over 30% of balance transfer users increased their debt by 10% or more after transferring their balance because they were unable to pay it in full before the interest applied. Although a notification 30 days before the introductory offer ends is a good heads up, you should set up a budget to repay your debt when you first conduct the balance transfer. You could also set yourself reminders each month to let you know when it's time to pay the balance and how much you have left.

Credit card cancellations

You will be notified if your credit card is cancelled and the bank will give you reasons for doing so. If you want to cancel your account, you can do so either online or over the phone. If you request it, the bank can also provide information about your recurring payments and outstanding balance.

Although some of these practices have already rolled out, all will apply from 1 July 2019. Currently, 20 banks and financial institutions are signatories to the current code, including ANZ, CBA, NAB and Westpac. You can see the full list of signatories below.

• Banks that are signatories to the current code

  • Adelaide Bank
  • AMP Bank
  • Arab Bank
  • ANZ
  • Bank of Melbourne
  • Bank of Queensland
  • Bank of Western Australia
  • BankSA
  • Bank of Sydney
  • Bendigo Bank
  • Citi
  • CommBank
  • HSBC
  • ING
  • Macquarie
  • NAB
  • Rabobank
  • Rural Bank
  • St.George
  • Suncorp
  • Westpac

Want to know more? You can see a full copy of the banking code of practice on the Australian Banking Association's website.
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