Credit card reforms passed the Senate last week, giving significant new protections to consumers.
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 who 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 old law, a credit contract was deemed unsuitable if it was likely that the consumer would be unable to comply with their obligations under the contract or could only comply with substantial hardship.
Under that rule, card issuers typically made an assessment of the borrower’s ability to meet minimum required repayments on the credit limit – typically 2 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 in 2016, 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 has been broadened to cover all forms of communication. The informed consent exemption has been removed. This amendment will take effect from July 1 this 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.
Under the old rules, if the interest-free period was forfeited, interest was 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 to 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.