The Australian Bankers Association says it has agreed to make life easier when it comes to credit card interest, but one finance expert warns that small businesses using credit cards could still be playing with fire even if new concessions are introduced.
The peak body for banks announced on Wednesday it has lodged a Banking Code of Practice with the Australian Securities and Investments Commission (ASIC) or approval, taking on several recommendations from independent and government reviews of the banking and finance sectors this year.
The new code includes changes to the terms and practices Australian banks should abide by when providing information and financial products to individuals and businesses. Key changes include how credit card terms are communicated, as well as how cards are issued and paid off.
The ABC reports one major change for credit card holders will mean that interest will only be calculated based on the balance remaining on a card. Under current practices, interest is usually calculated on the entire value of a purchase.
This could mean savings if a credit card holder has purchased something and then paid off part of it in the interest-free period, leaving them only to pay interest on the remaining balance afterwards.
This change could produce significant savings on interest payments for small businesses as well, given so many use consumer credit cards to get started, says founder of Healthy Business Finances, Stacey Price.
However, Price says the change still doesn’t solve concerns about business owners not paying off their purchases in full.
“But I think this is putting a solution out there that people will think sounds amazing, when if people are not actually paying off the purchases on their card now, it’s still a problem,” she says.
Estimating about 90% of her small business clients would use some kind of consumer credit card in their own name, Price says it’s alarming how few business owners really keep track of their debts. Many think that by only making the minimum payment each month means they are doing the right thing.
“We have some clients that every 12 months will shift credit cards to another interest-free card — but they’re not effectively paying the balance off,” she says.
The new banking code follows calls from Treasurer Scott Morrison in June to simplify card terms, including around the calculation of interest, and banning unsolicited credit card offers.
The ABA says the new code will also make it compulsory for banks to tell customers when they have reported a default to a credit reporting body, as well as warning credit card users before their introductory interest-free period expires.
Price says that while these changes might sound “fantastic”, they won’t stop foolish use of credit cards by business owners.
“Some people are meeting their repayment schedule so they think everything’s fine, but they made $3000 in purchases in a year and paid off $10. It’s like it doesn’t even exist,” she says.
Challenge in securing finance means consumer terms matter to SMEs
Changes to the banking code also draw on a suite of recommendations from independent reviewer Phil Khoury, who urged the big operators to develop fairer and clearer language for small business products.
The big four banks have told SmartCompany they are keen to clear up standard loan terms. However, Small Business and Family Enterprise Ombudsman Kate Carnell say the way banks sell consumer products like credit cards to business owners also matters.
“So many small businesses can’t get secured credit [from a bank] because they don’t own bricks-and-mortar. So what banks offer them instead is individual credit cards,” she says.
The biggest problem with this, other than the potential to rack up debt, is that many business owners aren’t clear on how much they’re paying to sign up to these cards.
“At the moment what we see is this is not clear, so if the code makes it much more obvious what you’re going to pay and what the rules are, that’s a good thing,” Carnell says.
The Ombudsman’s office has not seen a final draft of the new code, but is hopeful the small business code of conduct the banking sector has promised to review will hit the mark.
“We’ve seen some drafts during the process, and the last draft [we saw] still wasn’t right. There were still some contract clauses for example that looked like “catch all” clauses — let’s hope they’ve gotten rid of them.”