Banks and other lenders are being urged to do more to help consumers in a debt trap thanks to mounting credit card bills.
The financial watchdog ASIC says it expects card providers to identify people in difficulty after finding 18.5 per cent of cardholders were behind in repayments, could make only the minimum repayments or had persistent debt.
It's also proposing new rules to make card providers assess whether a consumer can repay the credit card limit within three years before giving them a card.
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ASIC's Credit Card Lending in Australia report found credit card holders owed $45 billion as at June 2017 and were charged $1.5 billion in fees.
People with multiple credit cards were the most likely people to have problems.
Banks are being urged to do more to help consumers in a debt trap due to mounting credit card bills. Source: AAP
And while some people transfer their debt from one credit card to another with a cheaper interest rate, they often end up increasing their debt by 10 per cent.
Melbourne pensioner Beverley Ferguson’s financial problems started when her husband died ten years ago. She received a credit card in the mail and told SBS she was quickly drowning in debt.
“How could I pay a $10,000 debt when I’ve got no money? It was a worry, a constant worry every day.”
Mrs Ferguson said she has since sought financial advice to get back on track, but she’d like to see financial institutions held to account.
Melbourne pensioner Beverley Ferguson ended up $10,000 in credit card debt. Source: SBS
“They’ll give you money but they don’t seem to take into consideration how are people going to pay it back?”
ASIC said many providers lured customers to cards with higher rates offering additional "lifestyle benefits" such as reward programs and longer interest-free periods.
The watchdog estimated they could have saved $621.5 million in interest payments if they had switched to a card with a cheaper rate.
But it found only two out of 12 credit card providers were proactive in helping customers struggling with debt.
"Two credit providers have begun pilot programs to proactively identify and engage with consumers that meet their own indicators of potential harm, low repayment behaviour or unsuited products," the report says.
"Credit providers should implement these types of initiatives, with indicators of potential harm or problems framed to capture an appropriate pool of consumers."
ASIC Deputy Chair Peter Kell said the watchdog expected card providers to act swiftly.
"We will be following up to ensure the problems we have identified are addressed, including public updates later this year," he said.
Tony Devlin, who heads the Salvation Army's Moneycare service for people with financial problems, supported ASIC's call for card providers to do more to help those who were struggling.
"It's still too easy to get a credit card and to increase the limit," he told AAP.
"The banks are quite happy for you to max out your card and pay the minimum repayment because they make a lot of money out of it.
"But if you are paying the minimum repayment you are potentially in hardship and they are the people the banks should be reaching out to and seeing if they can assist them rather than offering them more credit."
Consumer advocates say customers are unlikely to be offered lower rate cards and they should do appropriate research themselves.
“You can get down to 8 per cent…that’s pretty good as opposed to 21 per cent,” consumer advocate Christopher Zinn told SBS.
“So move to lower rate cards, get in control of your cards and don’t let them control you.”
Meanwhile, ASIC has named and shamed Citi, Latitude, American Express and Macquarie for retaining old rules for grandfathered credit cards issued before June 2012.
At the time, ASIC introduced rules requiring lenders to ensure customers did not have to pay more interest than they need to.
ASIC's report says while the four lenders are not breaking the law, they are charging longstanding customers more interest than they should.
Snapshot of the review
- 14 million open credit card accounts, an increase of over 300,000 since 2012
- Outstanding balances totalled almost $45 billion
- About $31.7 billion in balances on credit cards that are incurring interest charges
- Consumers charged about $1.5 billion in fees in 2016-17, including annual fees, late payment fees and other amounts for credit card use
- Around 62 per cent of consumers had only one credit card between 2012 and 2017
- Consumers with multiple cards generally had two cards
- Fewer than 5 per cent of consumers had five or more credit cards between 2012 and 2017
