Australians caught in the ‘credit card trap’ could soon experience some relief, as a Senate committee calls on the Government to focus on responsible lending and end credit card price gouging.
Prompted by the increasing gap between official interest rates and the interest charged on credit cards, a Senate committee, which includes both Labor and Coalition senators, has suggested that lenders should make credit card customers repay minimum amounts of interest and principle, as well as plainly advertise ongoing fees and interest as part of monthly billing systems.
Other recommendations include:
- cardholders should have the option of closing accounts online, instead of having to deal with bank staff trying to dissuade them from doing so
- providers should better assess a potential cardholder’s creditworthiness to pay off the balance of the debt, not just the minimum repayment
- consumers should be better informed about their credit card use, as well as the associated costs
- The Government should consider a minimum monthly repayment level for credit cards
- credit card providers should contact customers when balance transfer periods are about to expire to discuss costs and alternative affordable products – before the low rate ends and a much higher rate kicks in.
Consumers with outstanding credit card balances usually face interest rates of up to 23 per cent. In order to reduce these rates, the committee recommends encouraging increased competition amongst providers by reducing credit card interest repayments to around 2.5 per cent of the total outstanding.
It is thought that if customers paid more attention to the interest and continuing charges of a credit card, many of them may decide to switch to lower-cost accounts, thus increasing competition amongst providers.
“We’re looking at responsible lending and trying to create more competition,” said Labor Senator Sam Dastyari.
And although there are already many cards on the market from which to choose, interest rates are not currently the focus of competition because consumers mostly feel they can pay off their debt in time.
But by the end of June this year, Australians had $51.5 billion in credit card debt – $33.1 billion of which was accruing interest.
The report calls for improvements to lending assessments, and recommends that providers should make more of an effort to contact customers who have only been paying the minimum repayment for 12 months to discuss costs and affordability.
“The committee believes card providers should be explicitly required to evaluate credit based on a consumer’s ability to repay their credit limit over a reasonable period, rather than on their ability to meet minimum repayments,” the report said.
The committee suggests that the Government could also do more to promote alternatives to credit cards, such as peer-to-peer loans, which are usually available at much lower interest rates.
According to Consumer Action Law Centre Chief Executive Gerard Brody, financial counselling services receive more phone calls about credit card debt in the lead-up to Christmas than at any other time of the year.
What do you think of these suggestions? Do you think the current credit card system is fair? Or do you think the banks could do more to make the system fairer?