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The crack­down on credit cards doesn’t go far enough

Money Magazine Australia - - CONTENTS - Kirsty La­mont is a di­rec­tor at mozo.com.au.

The fed­eral gov­ern­ment has sprung into ac­tion to tackle Aus­tralia’s per­sonal debt prob­lem, with the lat­est data pin­ning the coun­try’s out­stand­ing credit card bill at around $52 bil­lion.

Fol­low­ing a se­nate in­quiry, the trea­surer, Scott Mor­ri­son, an­nounced a four-pronged ap­proach to crack­down on “un­fair and preda­tory prac­tices used by credit card providers”. The first phase is ex­pected to be in place by the end of the year.

First, the gov­ern­ment wants a change in the way el­i­gi­bil­ity for a credit card is as­sessed. Cur­rently ap­pli­cants need only demon­strate they’re able to meet the min­i­mum re­pay­ments, which Mor­ri­son sug­gests has left cus­tomers with debt they weren’t pre­pared to pay down. The new sys­tem would see ap­pli­cants as­sessed on their abil­ity to “re­pay the credit limit within a rea­son­able pe­riod”.

Un­so­licited writ­ten of­fers of credit limit in­creases have been banned since 2011 but the door was left open for providers to ap­proach cus­tomers with of­fers elec­tron­i­cally or over the phone with­out penalty. The sec­ond re­form will see the ban ex­tended to these of­fers.

The third re­form sim­pli­fies the way in­ter­est is cal­cu­lated, so that in­ter­est can only be charged from the end of the state­ment pe­riod on the amount out­stand­ing rather than the date of pur­chase.

Lastly, providers will be com­pelled to of­fer cus­tomers on­line op­tions to ei­ther can­cel credit cards or re­duce lim­its.

While the re­form is ben­e­fi­cial to card­hold­ers, it doesn’t push hard enough. An­other more ef­fec­tive op­tion the gov­ern­ment should con­sider if it is se­ri­ous about ad­dress­ing spi­ralling debt is com­pelling card is­suers to lift min­i­mum re­pay­ments.

In fact, Mozo cal­cu­la­tions show that in­creas­ing the min­i­mum re­pay­ment from 2% (or $10) to 10% (or $100) on the av­er­age credit card debt would save card­hold­ers around $6.4 mil­lion in in­ter­est charges. The debt would also be paid down in just over two years, rather than 35-plus years.

With an av­er­age debt per card­holder of around $4300, the re­al­ity is that keep­ing the min­i­mum monthly re­pay­ment of 2% will see plenty of card­hold­ers sad­dled with decades of debt.

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