The Government has tabled amendments to the Credit Act, which reform a number of areas in the credit card market. Consumers will fell the benefit.
The credit card reforms tighten responsible lending obligations, prohibit credit card providers from offering unsolicited credit limit increases, simplify the calculation of interest charges and require credit card contracts to allow consumers to reduce credit limits and terminate contracts more easily, including online.
The reforms are intended to deal with consumers that persistently incur high credit card interest charges due to the inappropriate selection of credit card product.
Tightening responsible lending obligations. The suitability of a credit card contract or credit limit increase will be assessed according to whether the consumer could repay an amount equivalent to the credit limit of the contract within a period determined by ASIC (in the United Kingdom that period is three years).
Under the current law, a credit contract will be deemed unsuitable if it is likely that the consumer would be unable to comply with their obligations under the contract or could only comply with substantial hardship.
Card issuers typically make an assessment of the borrower’s ability to meet minimum required repayments on the credit limit – typically two per cent of the outstanding balance.
The new rule takes effect on January 1, 2019 and will apply to new and existing contracts.
ASIC called for this change in a submission to a Senate Economics References Committee inquiry last year, arguing that high interest rates on cards were not necessarily the cause of hardship. Rather, it is the fact that “some consumers over-borrow and under-pay large amounts of credit card debt (to which the high interest is applied).”
ASIC said: “Some people begin with the intention of always paying off their balance in full and believe they will never pay interest.”
It said there was a need to “refine responsible lending obligations with a focus on appropriate product selection.”
Prohibiting unsolicited credit limit offers. The existing prohibition on written credit limit offers will be broadened to cover all forms of communication. The informed consent exemption will be removed. This amendment will take effect from July 1 next year.
Calculation of interest charges. From January 1, 2019, credit card providers will not be allowed to impose interest charges retrospectively to a card balance, or part of a balance, that has had the benefit of an interest-free period.
Currently, if the interest-free period is forfeited, interest will be charged from the date of the purchases on the full purchase cost, even if there was a partial payment by the end of the statement period.
Reducing credit limits and terminating contracts. Credit card contracts entered into on or after January 1, 2019 must provide an online means for the consumer to make a request to reduce their credit card limit or terminate the contract. If the consumer makes a request o reduce their credit limit or terminate their contract, the credit provider must not make a suggestion that is contrary to the consumer’s request. They must take reasonable steps to ensure that effect is given to the request.