New rules on credit cards will change the way you use credit

Credit card issuers have been hauled over the coals by the Hayne Banking Royal Commission and banking industry regulators. The result is new rules to protect credit card consumers. And that is great news for you.

Changes to the Code

An updated version of the Australian Banking Association's (ABA's) Banking Code of Practice has been approved by banking industry regulators. Several of the most recent Code reforms relate specifically to credit cards.

From 1 July 2019 these changes to the Code will better protect consumers and help prevent people from getting too far into debt with credit cards.

ASIC found that an astounding one in six customers struggle with credit card debt. ASIC also found that credit providers could do a lot more to address this potential debt trap. So how will more responsible lending affect you? 

Changes to how your credit card application is assessed

As of 1st January 2019, credit card applications have been assessed differently than they were previously.

Now credit card issuers must only approve you for a balance that you can afford to repay within three years.

So the card issuer assumes that the customer (you) will run their card to the limit, then measure if you have adequate available income to repay the balance within three years.

Fees on credit cards will also be taken into account, as will the existing limits and rates charged on other credit cards held by other providers. 

Customers will still have the option to keep paying the minimum repayments on their credit cards but you won’t be able to get approved for more than what you can repay within three years, not the minimum required repayment.

Balance transfer rule changes could bite $621 million

That is how much ASIC estimated could be saved (in total, not by you on your own) by Australians in just one year if they had a better suited credit card, with a lower rate or a more realistic credit limit.

When you are looking around and applying for a new credit card, perhaps to pay off and replace your old card, again you will be assessed on what amount you could afford to pay off over three years.

This may lead to more restrictive balance transfers, due to the potentially lower credit limits offered. And this applies, even if you are looking at transferring debt from a high rate credit card to one that offers a 0% introductory rate

So, if you’re looking to transfer a balance from one card to another, don’t automatically expect that the new card will have a limit which will cover the balance of the old one. 

If you aren’t offered a sufficient limit to cover a debt, instead of trying to pay off the balance of two credit cards, it may be a wiser approach to either take out a personal loan to cover the debt as these typically have lower rates than cards.

Even better yet, pay down the difference between your debt and the limit offered on the new card, until you are able to transfer all of the debt to a lower rate and not be caught making costly repayments to two different cards.

Do you want an increase to your credit card limit?

As of July 2019, invitations from your card issuer for credit card limit increases have been banned completely by ASIC. If you would like to increase the limit on your credit card, you’ll need to instigate the conversation with your card provider. They can no longer contact customers about an increase via any means—phone, text, email or even a casual remark over the counter at a branch.

[can we put a pic here of a bank teller talking to a customer? Or two people talking about a card?]

If you do opt to apply for a credit increase, you’ll be subject to the same new, stringent criteria as if you were applying for a new card. That is, card providers will need to consider carefully whether you can comfortably pay back the whole balance within a reasonable time frame, thereby hopefully keeping you away from too much debt.

How to cancel your credit card

This used to be difficult but gone are those lengthy delays waiting on the phone, only to be met by customer service personnel trying to convince you that you don’t really want to cancel your card.

All banks and credit card issuers now offer the option of cancelling your card, or reducing your limit, via the internet. Furthermore, if you contact them about either of these options, they are legally obliged to help you, and not try to talk you out of doing what you want.

BUT, there is a BIG rider on this reform. Online cancellation or limit changes only applies to cards which have been applied from 2019 and onwards.

One more reform which applies to those who already own credit cards is that backdated interest can no longer be charged. Previously, if you didn’t pay the full balance owing on your card by the due date, interest charges were added and calculated based on when purchases were made. From January on, credit card issuers are only able to charge interest on any unpaid balance which occurs after the due date.

Other loans are affected too

These reforms don’t just affect credit cards. As of July, other debt repayments are also taken into account. Whether you’re applying for a new card or an increase to an existing limit, the assumptions on other repayments to debts such as personal loans, mortgages and car loans are changed. 

When assessing eligibility and serviceability, it will also be assumed that the repayments on these loans will also be made across the three-year time span, no matter what you are paying, or over what time frame. It may mean that credit card providers assume a higher level of repayment than you’ve been making, which will impact what limit you’ll be offered. 

Ultimately, these reforms have been put in place to stop customers from getting in over their heads with credit card debt.

Even though only one in six card holders are getting in trouble, these new responsible lending criteria will affect everyone who holds a credit card

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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