The Australian Securities and Investments Commission (ASIC) intends to unveil new requirements and reforms for credit card lending practices after a report revealed one in six Australians is struggling with credit card debt.
Assessing the 21.4 million credit card accounts opened between 2012 and 2017, ASIC found 18.5% of Australian consumers are being swamped with credit card debt, and they blame poor advice and lending practices by Australia’s major financial lenders.
“Our findings confirm the risk that credit cards can cause financial difficulty for many Australian consumers”, ASIC deputy chair Peter Kell said in a statement.
The report, released today, shows that as of June last year, there were 14 million open credit card accounts in Australia, with outstanding balances totalling nearly $45 billion, of which $31.7 billion was incurring interest charges. Between 2016-17, Australian consumers were charged $1.5 billion in credit card fees.
Close to 550,000 Australians were behind on their credit card repayments, while another 930,000 have “persistent” credit card debt. Another 435,000 Australians say they only repay small amounts off their credit card balances.
This difficulty in paying off credit card debt is likely being felt by Australia’s small business owners too, as SMEs regularly rely on credit cards — both personal and business-specific — to finance their businesses in various fashions.
A survey of over 1,200 Australian SMEs by Scottish Pacific in March revealed that approximately 67% of small business owners rely on personal finance options such as credit cards to ease cash flow problems in their business.
Additionally, respondents also said they would prefer to use credit cards over other forms of cash flow management, with 66% saying they’d prefer to get a credit card over undertaking cash flow forecasts, or offering suppliers discounts for early payments.
This is backed up by data from the Australian Bureau of Statistics assessing the state of Australia’s SMEs in 2015-16. The report found that when seeking types of new or additional debt finance, 15.3% of SMEs would take out a new credit card, with 36% saying they would do so to maintain cash flow and 26% saying they would to ensure the survival of their business.
Speaking to SmartCompany, adjunct professor at Swinburne University of Technology and credit card expert Steve Worthington say it’s no secret that SME owners use credit cards as methods to aid cash flow and provide working capital. He says one of the biggest areas credit card users make mistakes in is when transferring balances, unintentionally bringing on more and more debt.
“People take out a credit card, then find themselves unable to repay the debt in full every period. They extend that debt, and pay huge amounts of interest, sometimes up to 20%, on new cards,” he says.
“There’s a lack of understanding on the consequences of balance transfers. They’re only a good deal if you have extreme discipline.”
Worthington says many consumers and business owners can be “gullible” when it comes to credit cards, leading to them overextending themselves. He believes the changes proposed by ASIC will allow users to see just how much they’re going to overextend their finances.
“It will make it a little clearer, and put a few more warning tags on it. It’s a good move, as a lot of users don’t fully understand the possible issues with credit cards,” he says.
Tougher regulations on the way for lenders
As part of its report, ASIC also revealed it has commenced consulting on a new set of requirements for credit card issuing, which will see tighter regulations against unsuitable credit card contracts.
These regulations are intended to come into effect from January 1 next year and will implement a new set of responsible lending practises based on assessments of whether consumers are able to repay the credit limit within three years.
ASIC found many consumers are carrying over their credit card balances to high interest-rate products, despite there being lower interest rate products available that could have saved them more money. If lower interest rate products were selected, ASIC estimates consumers could have saved approximately $621 million in interest in 2016 to 2017.
“Only a handful of credit providers take proactive steps to address persistent debt, low repayments or poorly suited products. There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings,” Kell said.
“We will be following up to ensure the problems we have identified are addressed, including public updates later this year.”
After implementing new laws in 2012 which required lenders to seek repayments against higher interest accounts first, ASIC’s new report also found lenders Citi, Latitude, American Express and Macquarie maintained the pre-2012 rules for customers who had opened credit card accounts prior to 2012.
While the lenders were not breaking the law, ASIC declared their conduct is “out of step with the rest of the industry” and estimated 525,000 consumers paid more interest as a result.
ASIC said Citi and Macquarie plan to no longer retail their older repayment allocation methodology for grandfathered credit cards from 2019, ahead of the introduction of a new Banking Code of Conduct. American Express has said it has similar plans, according to ASIC, while Latitude is reportedly considering its position.