How new credit card rules could stop you racking up debt


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From January 1 this year, the Australian Securities and Investments Commission (ASIC) introduced new regulations designed to help stop Australians from getting stuck with problematic credit card debt.

ASIC found that out of more than 10 million Australians who had credit cards, 930,000 consumers consistently had a balance that was close to its credit limit, and a further 435,000 paid down their balance very slowly.

In other words, these credit card customers were not making any real headway paying off their balances and would be paying the high interest rates that can apply on credit cards, for a long time.

new credit card rules

Australia's 10 largest credit providers have now committed to improving their lending practices above and beyond the requirements of the law.

Below are some of the recent changes to credit card lending and what you should do to make the most of it.

Lower credit card limits

The new credit card regulations mean that if you apply for a credit card you may be offered a lower credit limit than you would have in the past.

Consider how much credit you really need and can afford.

When you apply for credit, the goal should be to use the credit card as a convenient tool to manage payments and spending over the short term. You should not use the card as a way of taking on long-term debt.

Assessing existing credit card limits

When you apply for any new credit such as a home or car loan, the lender must assess whether you'll be able to afford both the new loan and any existing credit.

To do this, the lender will treat the full limit of your existing credit cards as a debt owing, rather than just looking at the balance on the card.

This means that a higher credit limit on your card - even if you don't use it - will reduce the amount you can borrow with the new loan.

Many people have an unused credit card sitting in the draw for a "rainy day". Even if you don't think you'll be tempted to splurge on the card, consider whether you really need the card or the limit.

It's a good idea to look at the combined limit of all the cards you hold so it doesn't count against you when applying for a mortgage or other loan.

Paying down balance transfers

Balance transfers can be a useful tool for credit card users to reduce the rate of interest they are paying.

ASIC's report found that more than 53% of people who used a balance transfer reduced their debt by at least 10%.

However, simply transferring debt does not reduce it, and a number of credit card providers are now proactively taking steps to encourage consumers to pay down their balance transfers.

If you are considering a balance transfer, set yourself a payment target for each month to ensure you can make the most of the low interest period. Remember, just paying the minimum payment each month probably won't make a big dent in the balance before the period ends.

You should also seriously consider closing the account you are transferring the balance from, so you are not tempted to add to your debt by continuing to use that card.

More detailed credit reports

Credit reports now contain more detailed information about your use of credit, including monthly updates on your repayment behaviour.

This additional information is part of Comprehensive Credit Reporting which came into effect in July 2018. It is, therefore, more important than ever to know what's on your credit report and take charge of your credit health.

Lenders will look at your credit report when assessing you for a new loan so it's important to understand what's on your credit report and how to get a free copy.

How you treat your credit health now will affect your ability to access credit further down the line, or when you need it the most.

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Mike Laing is chief executive of the Australian Retail Credit Association, which founded to help consumers understand how credit reporting operates in Australia. He has served as a director and chair of various financial services and payment companies and has led businesses in Australia, New Zealand, the United Kingdom, and Ireland. Mike holds a Master of Commerce (Hons I), is a graduate member of the Australian Institute of Company Directors, and a member of the Chartered Institute of Arbitrators.

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