What proposed credit card reforms could mean for you
In the dying hours of the 44th parliament, the federal treasury released a discussion paper titled "Credit cards: improving consumer outcomes and enhancing competition".
The paper notes that for a particular subset of consumers, credit cards "may impose a substantial burden on financial wellbeing".
We couldn't agree more.
Australians hold $32 billion in credit card debt at an average of around $4300 a card (paying over $700 a year in interest).
At Consumer Action, we often deal with consumers with credit card debts of more than $10,000, $50,000 and sometimes $100,000. The "subset" of struggling consumers is substantial.
To address this, the paper proposes two reform phases. "Phase 1" tightens responsible lending rules and broadens the prohibition on unsolicited offers. It prohibits backdating of interest charges, and charging interest on the paid portion of balances.
Providers would be required to provide online tools for card cancellations and credit limit reductions.
"Phase 2" (which will be pursued only after consumer testing) contains reforms to stimulate competition and address under-repayment.
Finally, the paper notes two options "not preferred at this time": specifically, a requirement for issuers to make switching easier; and to increase minimum repayment amounts.
Our verdict? The Phase 1 credit card reforms are excellent and long overdue.
Constraining unsolicited offers is great, and lenders will finally be required to assess applicants' capacity to repay the entire credit limit over a "reasonable period".
We think this period should be three years. Any longer and the long-term debt sentence of credit cards becomes entrenched.
The Phase 2 reforms are also good, as is the proposal to test their validity through "laboratory experiments [and] in-field experiments".
Too often policy is made without understanding its real-world impact. Let's hope the banks co-operate with robust testing.
Finally, the "not preferred at this time" credit card reforms are powerful. It is extremely disappointing that they've been sidelined. Submissions are due on June 17, about two weeks before the election.
The paper has crept into the caretaker period with a "softly, softly" approach.
However, if implemented, the impact on the most vulnerable credit card debtors would be substantial.