ASIC's review into credit card lending in Australia has found that 18.5% of consumers are struggling with credit card debt. ASIC reviewed 21.4 million credit card accounts open between July 2012 and June 2017.
ASIC's report released today (REP 580) finds that while credit cards offer flexibility, they can present a debt trap for more than one in six consumers. In June 2017 there were almost 550,000 people in arrears, an additional 930,000 with persistent debt and an additional 435,000 people repeatedly repaying small amounts.
'Our findings confirm the risk that credit cards can cause financial difficulty for many Australian consumers', ASIC Deputy Chair Peter Kell said.
Consumers are also being provided with credit cards that don’t meet their needs. For instance, many consumers carry balances over time on high interest rate products, when lower-rate products would save them money. ASIC estimates that these consumers could have saved approximately $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate.
Deputy Chair Kell said that '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. We will be following up to ensure the problems we have identified are addressed, including public updates later this year'.
ASIC has also today commenced consulting on a new requirement that will strengthen responsible lending practices for credit cards.
ASIC also looked at balance transfers and their effect on debt outcomes. The data shows that while many consumers reduce their credit card debt during the promotional period of transfer to a new card, a concerning number of consumers increase their debt: over 30% of consumers increase their debt by 10% or more after transferring a balance.
ASIC found that rules introduced in 2012 that require lenders to apply repayments against amounts accruing the highest interest first have helped reduce the interest charged on credit card debt. However, four lenders (Citi, Latitude, American Express and Macquarie) have retained old rules for grandfathered credit cards open before June 2012. ASIC estimates that almost 525,000 consumers have paid more interest as a result.
ASIC found that while these four credit providers are not breaking the law, they are charging their longstanding customers more interest than they should have been, and their conduct is out of step with the rest of the industry.
In anticipation of a new Banking Code of Practice, from 2019 Citi and Macquarie will no longer retain the older repayment allocation methodology for grandfathered credit cards. American Express has also indicated that it will make this change in 2019. Lattitude is considering its position.
Background
On 16 December 2015 the Senate Economics References Committee released its report relating to credit card interest rates, Interest rates and informed choice in the Australian credit card market (the Senate Inquiry). A primary concern of the Committee was that too many Australians are 'revolving' credit card debt for extended periods of time while paying high interest charges.
In March 2018, the Government implemented the first phase of reforms in response to the Senate Inquiry. These reforms will help prevent future consumers from experiencing problem credit card debt by:
- ensuring that credit providers assess a consumer's ability to repay a credit card limit over a period prescribed by ASIC
- banning unsolicited credit limit increase invitations, and
- making it easier for consumers to cancel credit cards.
ASIC has also today released a consultation paper about the credit assessments reform proposing that ASIC prescribe a period of three years. Once implemented this reform will strengthen responsible lending assessments for credit cards.
ASIC's review
In 2017, ASIC began a review into credit card lending in Australia. As well as picking up on issues highlighted by previous regulatory reforms and the Senate Inquiry.
ASIC's review of credit card lending focused on:
- consumer outcomes – including whether there are people with debt that causes problems, such as missing payments or carrying lots of credit card debt over time
- the effect of balance transfers on the amount of debt, and
- the tailored rules that apply to credit cards.
Snapshot of the market
- As of June 2017:
- there were 14 million open credit card accounts, an increase of over 300,000 since 2012.
- Outstanding balances totalled almost $45 billion.
- Approximately $31.7 billion in balances on credit cards that were incurring interest charges.
- Consumers were charged approximately $1.5 billion in fees in 2016-17, including annual fees, late payment fees and other amounts for credit card use.
- Around 62% of consumers had only one credit card between 2012 and 2017.
- Consumers with multiple cards generally had two cards.
- Fewer than 5% of consumers had five or more credit cards between 2012 and 2017.
ASIC's MoneySmart
ASIC's MoneySmart website has information for consumers about choosing and using credit cards, including information about balance transfers, how to pay off multiple cards and how to cancel a credit card.
Consumers can also use MoneySmart's credit card calculator to work out the fastest way to pay off their card and how much they can save by paying it off sooner.