More than one in six consumers struggling with credit card debt

ASIC's review into credit card lending in Australia has found that 18.5% of consumers are struggling with credit card debt.

 

Australian Securities and Investments Commission (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'.

 

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.

 

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.

 

See the ASIC infographic at https://download.asic.gov.au/media/4800801/asic-credit-card-infographic-4-july-2018.pdf

 

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.

 

4 July 2018.