Consumers live to regret lure of easy credit

AUSSIES are learning to be wary when their bank comes knocking with a new offer, especially when it comes to credit cards.

Finder.com.au research revealed that 37 per cent of Australians who had increased their card limit in the past five years regretted it. Many now struggle with increased debt or a negative effect on their credit file and ability to borrow.

The survey of 2011 respondents also revealed the worrying statistic that 57 per cent of those who had recently increased their credit card limit had done so at the suggestion of their bank. More than one in three wished they had ignored the advice.

Finder.com.au spokeswoman Bessie Hassan estimated 1.3 million credit card holders were now struggling with debt as a result of lifting their credit card limits.

“They’ve found themselves in a situation where they have exceeded their credit utilisation threshold,” she said. “Had they kept their previous lower maximum limit, it’s unlikely they would have fallen into a debt trap.”

New amendments to the National Consumer Credit Protection Act 2009 forbid banks from inviting customers to increase card limits, but the reform – in force since July – may not be helpful for the 43 per cent who applied for increases themselves.

Ms Hassan said increasing limits could work for disciplined customers wanting to earn rewards points on large transactions, provided they paid their bills on time, but others should consider being proactive with debt reduction instead.

“Work on increasing the amount of available credit by paying down your balance instead of getting into more debt,” she said.

Australian credit card holders have an average limit of close to $10,000 on their credit cards, 34 per cent of which they actually use. Some do not realise that increasing limits can affect their credit score, even if they do not actually spend the extra money. Credit Card Compare CEO David Boyd said card holders should prioritise clearing debt and paying bills on time. “Balance transfer cards are the best way to clear debt and they give you 25 months,” he said. “But you’ve got to close down the old card. Otherwise the temptation is that you keep two cards open.”

Credit card users often increase their limits because of a large upcoming purchase, said Society One CEO Mark Jones, who suggested looking at alternatives.

“If you need finance for a certain purpose, like renovation or debt consolidation, a personal loan can get you a better interest rate and a shorter repayment term,” Mr Jones said.