ASIC - Credit Card lending in Australia - Report 580 - July 2018

REPORT 580

Credit card lending in Australia - July 2018

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1 Credit cards are credit contracts that offer consumers regular advances up to a specified limit, with the total amount of credit available decreasing as advances are made. These contracts give consumers flexibility about how much of the balance owing they repay (subject to a contractual minimum amount, which is often less than 3% of the balance).

2 Although this flexibility can make credit cards a useful tool for consumers, some concerns have been raised about their distribution and use: (a) Credit card product design and long-term debt—Consumers can carry large balances on their cards for extended periods at high interest rates, including balances that they have no prospect of repaying in the short-to-medium term (or that may cause financial harm in the future if their circumstances change).

(b) Credit card marketing and increasing debt levels—Some features of credit cards offered to consumers, such as high interest rates or balance transfers, can lead to many consumers carrying more debt over time.

(c) Credit card selection—Consumers can face challenges selecting credit cards suited to their actual behaviours, in that: (i) behavioural biases may affect product selection and use, causing consumers to choose a credit card because of certain features (e.g. interest-free periods and balance transfer offers) rather than a card that aligns with their behaviours, resulting in additional costs; and

(ii) differences in credit card features and terms can be difficult for consumers to assess.

3 Since 2012, the National Consumer Credit Protection Act 2009 (National Credit Act) has contained additional requirements for credit cards intended to address some of these issues. However, more recent inquiries, such as the Senate Inquiry into credit card interest rates (Senate Inquiry), have concluded that these issues persist within the Australian credit card market.

Note: Studies in other jurisdictions have found similar issues. See the Financial Conduct Authority (FCA), MS14/6 Credit card market study: Final findings report (July 2016).

4 The Senate Inquiry also expressed concerns about the effect of balance transfers. Balance transfers allow consumers to transfer some or all their credit card balance to another card and pay minimal or no interest on the transferred amount for a specified promotional period. This can give consumers an opportunity to pause or reduce interest charges on their outstanding balance (giving the consumer a chance to pay off the debt), or to switch credit providers.

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5 In the Senate Inquiry’s view, these transfers can present a ‘debt trap’ for consumers. That is, the Inquiry was concerned that consumers could increase their total credit debt if they transfer a balance to a new card to take advantage of an offer but: (a) fail to pay off the transferred balance in the promotional period;

(b) keep the card the balance was transferred from; and

(c) make new purchases on one or more of the cards.

6 In 2017, ASIC began a review into credit card lending in Australia, looking at issues highlighted by regulatory reforms and the Senate Inquiry. The review focused on three areas: (a) Consumer outcomes—We sought to identify the debt outcomes for consumers from their credit card products over time, with particular attention to consumers who are in arrears, carry debt at a high interest rate for a long period, or repeatedly make low repayments.

(b) Balance transfers—We looked at when and how balance transfers are used, how they are repaid and their effect on aggregate credit limit and debt levels over time.

(c) Effectiveness of key reforms—We wanted to look at the effect of the additional requirements for credit cards, especially: (i) disclosures intended to help consumers choose credit cards and encourage them to make larger repayments; and

(ii) requirements standardising how repayments are allocated to outstanding balances.

7 Twelve credit providers participated in our review. These providers covered the vast majority of the credit card market and include the major banks, a mixture of mid-tier banks, foreign banks, customer-owned banking institutions and non-bank lenders.

8 We also consulted with other stakeholders, including domestic and international government agencies, industry associations and consumer advocacy groups.

9 As part of our review, we obtained the following data: (a) Quantitative data—Credit providers gave us 659 data points for each credit card account open between July 2012 and June 2017 (21.4 million

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(b) Qualitative data—Credit providers answered 51 questions about responsible lending, hardship processes, their response to the additional requirements for credit cards, the availability of balance transfers and proactive action they took on consumer debt issues.

10 We conducted a data linking exercise using the quantitative data so that our review and analysis could be conducted on a ‘whole of wallet’ or ‘person level’ without knowing the identity of each consumer in our dataset. This is important as consumer outcomes may not be clear based on each card in isolation.

11 We also commissioned consumer research about the uptake and use of balance transfers and followed up with additional research as needed.

12 We sought to understand the credit card market in Australia more generally. Based on the data we collected, at June 2017: (a) there were over 14 million open credit card accounts (an increase of over 300,000 since July 2012);

(b) outstanding balances totalled almost $45 billion (an increase since 2012, although balances showed signs of seasonal variation);

(c) outstanding balances on cards where interest was being charged totalled $31.7 billion (a decline from over $33 billion in 2012); and

(d) consumers were charged approximately $1.5 billion in fees over the previous year, including annual fees, late payment fees and other amounts for credit card use.

13 Our data linking exercise indicated that 12.3 million people owned the 21.4 million cards in the dataset. There is a difference between the number of people and the number of credit cards because the linking exercise identified those consumers who were highly likely to have more than one card.

14 Most consumers had only one credit card between 2012 and 2017: 62.1% of cards were not linked to any other card. Consumers with multiple cards generally had two cards. The linking exercise indicated that less than 5% of consumers had five or more credit cards between 2012 and 2017.

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15 In our review, we identified four situations where credit card debt is potentially problematic and developed indicators for each category:

(a) Severe delinquency—The account has been written off or is in the worst state of delinquency that the relevant credit provider reported to us.

(b) Serious delinquency—The account has been 60 days (or more) overdue in the previous 12 months. 　

(c) Persistent debt—The average balance of the credit card is 90% of the credit limit over the previous 12 months and interest has been charged.

(d) Repeated low repayments—The consumer has made eight or more repayments on the account at or below 3% of the credit limit and interest has been charged over the previous 12 months.

16 At June 2017, 18.5% of consumers with a card satisfied at least one of the problematic debt indicators. We found:

(a) over 178,000 people were in severe delinquency;

(b) almost 370,000 additional people were in serious delinquency;

(c) around an additional 930,000 people had persistent debt; and

(d) roughly a further 435,000 people made repeated low repayments.

17 Some satisfied more than one indicator, sometimes for multiple cards. For example, at June 2017: (a) 1.7% of consumers were in severe delinquency on at least one card;

(b) 5% of consumers were in serious delinquency on at least one card;

(c) 10.8% of consumers had persistent debt on at least one card; and

(d) 8.5% of consumers made repeated low repayments on at least one card.

18 Not all consumers with persistent debt and repeated low repayments may currently be vulnerable or experiencing harm. However, consumers in these situations may be at risk of future problems, potentially driven by changes in life circumstances. These consumers may also be charged more interest compared to other finance options.

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19 We found some areas of particular concern: young people were more likely to be in delinquency, and multiple card holders were over-represented in our indicators. Additionally, over 890,000 consumers who were in problematic debt in 2013 also met our indicators in 2017. It was relatively more common for consumers to meet the persistent debt or repeated low repayment indicators in both 2013 and 2017, suggesting that there is scope for further measures to help these consumers.

20 Many credit providers have promoted cards with higher interest rates that have additional ‘lifestyle’ benefits such as reward programs and longer interest-free periods. Consumer behavioural biases can mean that consumers select a card based on these promoted benefits rather than on how they are likely to use the credit card in practice.

21 We looked for consumers with products that were not suited to their behaviours. Specifically, we looked for consumers who: (a) carried a balance and were repeatedly charged interest on a high-interest rate card;

(b) repeatedly exceeded their credit limit; and

(c) had a card with relatively high fees that they did not regularly use. 　

22 At June 2017: (a) 19% of consumers (who we had enough information about) were charged interest for three or more months in the previous year on a high-interest rate card; 　

(b) 10.7% of consumers had exceeded their credit limit for two or more months in the previous year; but

(c) we did not find evidence of consumers having cards with substantial fees that they did not regularly use.

23 For consumers that were repeatedly charged interest on high-interest rate cards, we estimate that the amount of interest charged could have been reduced by at least $621.5 million in 2016–17 if interest was charged at 13%.

24 Consumers with cards that were not suited to their behaviours were also more likely to satisfy our problematic debt indicators.

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25 We asked credit providers whether they proactively take steps to prompt larger repayments, look for potential hardship or products that do not suit consumers’ behaviours.

26 In general terms, few take these proactive steps: (a) nine of the 12 providers do not proactively contact consumers that make payments at or near the minimum amount for an extended period to prompt them to repay more of their outstanding balance; and

(b) eight of the 12 providers did not proactively look for signs of potential consumer harm (other than through training frontline staff to look for signs of financial difficulty after a consumer initiated a discussion).

27 Consumers who are in persistent debt, or repeatedly making low repayments, are profitable for credit providers. However, providers have obligations to conduct themselves efficiently, honestly and fairly.

28 Two credit providers have begun pilot programs to proactively identify and engage with consumers that meet their own indicators of potential harm, low repayment behaviour or unsuited products. Others were considering or developing their own initiatives.

29 Credit providers should implement these types of initiatives, with indicators of potential harm or problems framed to capture an appropriate pool of consumers. We consider that this is consistent with: (a) their obligations to engage in credit activities efficiently, honestly and fairly; and

(b) a culture of prioritising consumers’ interests. 　

30 At June 2017, balances had been transferred onto 7.6% of open credit card accounts. Across the five years of our review, consumers transferred $12.4 billion in balances.

31 The use of balance transfers varied substantially between providers: some do not promote balance transfers and represent fewer than 1% of the accounts that received a transferred balance. By comparison, some larger credit providers held between 15% and 20% of all accounts open at June 2017 that had received a transferred balance.

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32 Rates during the promotional period also varied between providers, although 79% of balance transfers in our dataset had a promotional rate of 0%. Consumers said that reducing debt was a key motivation to transfer balances, and that the promotional rate was an important consideration when deciding on a particular transfer.

33 Almost all balance transfers had a promotional period of 24 months or less. The most common periods were six, 12, 15 and 18 months; 60.9% of balance transfers had a promotional period of between 12 and 18 months.

34 Consumers with a higher level of credit card debt across all their cards were more likely to transfer balances.

35 To consider the effect of balance transfers on debt levels, we compared the total balance of all the consumer’s cards at the start of the transfer to the total balance shortly after the promotional period ended.

36 We found that approximately: (a) 53.1% of consumers reduced their total debt by 10% or more, with almost 8% paying the debt off completely;

(b) 15.3% of consumers maintained relatively stable total debt levels; and

(c) 31.6% of consumers increased their total debt by more than 10% (with 15.7% increasing their debt by 50% or more).

37 Consumers who transferred more than one balance were less likely to reduce and more likely to increase their total credit card debt during the promotional period (but achieved relatively better outcomes on later transfers).

38 These findings suggest that the ‘debt trap’ risk for balance transfers noted by the Senate Inquiry exists and affects a substantial proportion of consumers.

39 Despite prompts from the Senate Inquiry for credit providers to remind consumers with an outstanding debt from a balance transfer that the promotional period is about to end, many consumers do not receive any warning. The interest rate on outstanding debt after this period is usually significantly higher than the promotional rate.

40 Of the 10 credit providers that offer promotional rates on balance transfers, five do not take proactive steps to remind customers who have not repaid the transferred amount that the promotional period is about to end.

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41 Over 63% of consumers who transferred balances did not cancel any of their other credit cards. Older consumers were slightly less likely to cancel other cards after transferring a balance.

42 If a consumer did cancel a credit card, this most commonly occurred soon after the balance was transferred. Consumers were progressively less likely to cancel cards during the six months after the balance was transferred.

43 Most consumers (53.8%) used the card with the transferred balance. This included 21.7% of consumers with interest charges exceeding $5 in fewer than six months of the promotional period, and 32.1% with interest charges in six or more months. Consumers who used the card were less likely to reduce their debt during the promotional period.

44 Some consumers appeared to use both their old cards and their new card(s) with the transferred balance. Consumers who did not cancel a card, and who used both their old and new cards, were more likely to increase their total debt during the promotional period.

45 The Key Facts Sheet is a standardised one-page document intended to help consumers compare credit cards and choose one that suits their needs. However, the data available for accounts opened online suggests that many consumers are unlikely to have engaged with the Key Facts Sheet when applying for their credit card.

46 Most credit providers offer tools to help consumers choose cards. Some provide interactive tools that prompt consumers to think about what features are important to them or how they use their credit cards.

47 Under the additional requirements implemented in 2012, credit card repayments must be allocated to balances with higher interest rates before those with lower interest rates (unless the consumer requests otherwise). This reform was intended to standardise practices and prevent terms that maximised the time and money needed to repay credit card debt.

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48 This requirement has saved consumers money; prevailing practices before 2012 were inconsistent across credit providers, but generally less favourable for consumers. Eight of the 12 credit providers have applied this requirement to all their consumer credit cards.

49 However, four providers (American Express, Citi, Macquarie and Latitude) continue to apply previous practices for some or all credit cards contracts entered before July 2012. We estimate that 525,000 consumers may have been charged extra interest as a result, including on more than one card. While these four credit providers are not breaking the law, they are charging their longstanding customers more interest than they should, and their conduct is out of step with the rest of industry.

50 In anticipation of a new Banking Code of Practice, from 2019 Citi and Macquarie will no longer use the previous method of allocating repayments for grandfathered credit cards. American Express has also indicated it will make this change in 2019. Latitude is considering its position.

Note: The new draft Code was lodged with ASIC for approval under s1101A of the Corporations Act 2001 (Corporations Act) in December 2017. The current version, issued by the Australian Banking Association (ABA) in 2013, is the Code of Banking Practice.

51 The minimum repayment warning is a disclosure on the credit card account statement that compares the total cost and time to pay off the balance through minimum repayments with an alternate repayment which would repay the balance over two years. The warning aims to highlight the effect of making minimum repayments and encourage higher repayments.

52 Based on a sample of credit cards from some credit providers in our review, we did not find evidence of a ‘spike’ in repayments at the level included on account statements.

53 In response to our findings, we expect improvements in credit providers’ practices. We will also be continuing our work on credit cards to ensure the problems we have found are addressed.

54 We are concerned by the amount of problematic credit card debt we found. Although not all consumers with problematic debt will be vulnerable, some may be in financial difficulty now, while others may be at risk of harm in the future.

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55 We expect credit providers to proactively look for signs of problematic credit card debt. The steps that should be taken vary based on the severity of the problems and how long they have persisted.

56 We note that the regulatory regime in the United Kingdom now requires proactive steps to be taken to address persistent credit card debt, including forbearance in some cases. While this is not the case in Australia, we nonetheless expect credit providers to significantly expand their efforts in this area. By 30 September 2018, ASIC will publish the list of credit providers that have committed to introducing proactive measures to address problematic credit card debt and products that do not suit consumers.

57 Some consumers regularly exceed their credit limit. We obtained information from some credit providers about the extent to which they allow consumers to exceed their credit limit, and found that current practices vary greatly.

58 There is some scope under the National Credit Act for consumers to exceed their credit limit. This can give consumers access to credit for emergency purposes, or avoid discontent or embarrassment if transactions are declined that would take them only slightly above their credit limit. However, regularly exceeding the credit limit creates risks of financial hardship.

59 We are concerned about the extent to which a small number of credit providers are allowing consumers to exceed their credit limit, as well as the lack of clarity about this practice. We expect credit providers to review, and where necessary reduce the extra credit they allow consumers to access.

60 Our view is that credit providers should not ordinarily allow consumers to exceed their credit limits by more than 10%. We will consider further action if this practice is not curtailed.

61 All credit providers should tell consumers when the promotional period for a transfer is ending. Under the new Banking Code of Practice, credit providers that are members of the Australian Banking Association (ABA) will be required to provide 30 days’ notice before the promotional period for a balance transfer is ending.

62 We will contact credit providers that are not members of the ABA and request that they make a similar commitment. By 30 September 2018, we will provide information on ASIC’s MoneySmart website about those credit providers that will not be providing notice.

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63 In line with paragraphs 54–56, we think credit providers should also: (a) proactively look for and engage with consumers who are not reducing a transferred balance as the promotional period continues; and

(b) actively promote structured payment arrangements to help consumers steadily pay down transferred balances where they wish to do so. 　

64 The fact that consumers do not cancel an old card after a balance transfer is increasing the risk of higher total debt levels over time.

65 The Government has amended the National Credit Act to make it easier for consumers to cancel credit cards. This reform provides an opportunity for credit providers to ensure that balance transfer offers achieve their intended purpose—that is, an ability for a consumer to benefit from a reduced interest rate without increasing their total debt levels.

66 Some consumers make new purchases on credit cards with transferred balances that are benefitting from a 0% promotional rate. In these circumstances, new purchases generally do not receive the benefit of an interest-free period unless the consumer pays off the closing balance in full, including the transferred balance on which interest is not charged.

67 We consider that there is scope for fairer outcomes in this (and similar) contexts. This could include excluding balances with a 0% promotional rate from the amount that needs to be repaid for an interest-free period to apply.

68 To encourage best practice, by 30 September 2018 we will highlight on ASIC’s MoneySmart website those credit providers that have committed to taking a fairer approach.

69 Many credit providers have developed tools to help consumers to choose credit cards, in some cases interactive tools.

70 Future developments in this area should focus on providing tools that allow consumers to better choose products that match their actual needs and use.

Note: The Government has accepted the recommendations of the Independent Review into Open Banking and that regime will apply to credit card data: see Treasury, Government response to the Open Banking review (9 May 2018).

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71 The tools provided should cater as much as possible to known consumer biases that may affect product choice and use, as these biases can result in additional costs or risks of harm.

72 In our view, developing tools to encourage consumers to choose cards that suit their actual needs and use is consistent with credit providers’ obligations to engage in credit activities efficiently, honestly and fairly, as well as culture of prioritising consumers’ interests.

73 We are concerned that hundreds of thousands of consumers who have had a credit card for six years or more are missing out on the benefit of more favourable allocation of repayments.

74 All credit providers that have not applied the requirement in the National Credit Act to every credit card should do so as soon as possible. We note that the ABA has included a commitment in the new Banking Code of Practice reflecting the repayment allocation requirement that will apply to all consumer credit cards provided by subscribers to that code.

75 Based on the information provided to us, responsible lending assessments for credit cards can be improved.

76 Some credit providers reported that in some or all cases, they were conducting these assessments based on a consumer’s ability to make the contractual minimum repayment when the entire credit limit is used. Others were assuming that repayments on other credit cards would only be made at the contractual minimum (and that those other cards were also fully used).

77 During our review, the Government amended the National Credit Act to give ASIC the power to prescribe a period for assessing whether a credit card contract or credit limit increase is unsuitable (for the purposes of responsible lending). The rationale of this change was to tighten the existing obligations to address the harms identified by the Senate Inquiry.

78 We propose to prescribe a period of three years for these assessments: see Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303). We encourage credit providers to give feedback on our proposal. CP 303 also sets out our expectations about the assumptions used in assessments.

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79 We will engage with industry about how they address our findings and expectations and improve their credit cards and behaviours. By 30 September 2018, we will publish on our MoneySmart website information about credit providers that: (a) have committed to develop and introduce proactive measures to address problematic credit card debt and products that do not suit consumers;

(b) are taking fair approaches to additional purchases on balance transfers; and

(c) are not providing notice to consumers before balance transfer promotional periods end.

80 We may consider providing information about other matters relevant to our review and findings.

81 Our work on credit cards will continue beyond 2018. We will conduct a follow-up review in two years to track: (a) the amount of problematic credit card debt and number of cards that do not suit consumers (e.g. consumers that repeatedly exceed their limit);

(b) the effect of balance transfers on debt outcomes; and

(c) whether card cancellation rates change.　

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• over 14 million open credit card accounts in Australia with total outstanding balances of almost $45 billion;

• total outstanding balances of $31.7 billion on cards where interest was being charged; and

• approximately $1.5 billion of fees charged over the previous year.

82 ASIC took over the regulation of consumer credit on 1 July 2010 under the National Consumer Credit Protection Act 2009 (National Credit Act). This Act established a national consumer credit framework, administered by ASIC as the single national regulator.

83 The National Credit Act contains a licensing regime that imposes minimum standards of conduct for credit providers and other participants, including requirements for: (a) competence;

(b) membership of an external dispute resolution (EDR) scheme;

(c) compensation arrangements;

(d) adequate compliance and risk management systems; and

(e) responsible lending obligations, which require credit licensees to take certain steps before providing a credit card to a consumer or increasing a cardholder’s credit limit. 　

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84 For example, credit licensees must make inquiries into a consumer’s requirements and objectives, and make inquiries into and verify a consumer’s financial situation. They must assess this information and not provide or suggest credit that will not meet the consumer’s requirements and objectives or where they will not be able to meet their financial obligations without substantial hardship.

Note: For ASIC’s guidance on these requirements, see Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209).

85 In 2011, Parliament introduced additional requirements for credit cards in the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011 (Home Loans and Credit Cards Act). The Explanatory Memorandum to this Act acknowledged that credit card contracts differ from other credit contracts and therefore require specific regulation.

86 This is because: (a) credit providers only require consumers to make repayments calculated at a low percentage of the outstanding balance, which means consumers can carry high balances for a significant period at relatively high interest rates;

(b) differences in features between credit card products are not easily visible to consumers; and

(c) credit cards are long-term arrangements, which means the credit provider may, over time, significantly change the terms of the contract or the consumer’s obligations.

87 The additional requirements: (a) state that credit providers must give consumers a Key Facts Sheet;

(b) specify how repayments should be applied under credit card contracts;

(c) prohibit additional fees for the use of credit cards above the credit limit unless consumers have given their consent; and

(d) restrict the making of unsolicited offers to increase a credit card limit. 　

88 In 2015, the Senate Economics References Committee conducted an inquiry into credit card interest rates and other matters (Senate Inquiry). In its final report, the Committee expressed concerns that some consumers may never repay their credit card debt or may take a long time to do so, while paying a relatively high interest rate on their balance.

Note: See Senate Economics References Committee, Interest rates and informed choice in the Australian credit card market (December 2015).

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89 Credit card balance transfers were also seen as a potential ‘debt trap’ (i.e. rather than offering a low-cost way to reduce debt, many consumers may transfer their debt from card to card and subsequently increase their spending and their overall debt).

90 The Senate Inquiry final report recommended further requirements, including that providers: (a) tell consumers about the features of their cards, making it easier for them to switch or cancel an account online, and

(b) base responsible lending assessments on the consumer’s ability to pay off the balance over a reasonable period.

91 After Treasury consulted in 2016 on many of the recommendations, the Government decided to implement further reforms in a phased approach. Table 1 summarises the first phase of these reforms in the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 (Banking Measures Act).

92 The 12 credit providers in our review gave us data on 21.4 million credit card accounts. Based on this data, at June 2017 there were 14 million consumer credit card accounts open. This represents an increase of over 300,000 accounts since July 2012. There was a steady increase in the number of open accounts in 2012 and 2013, and more fluctuation in later years: see Figure 1.

93 At June 2017, there were balances outstanding of almost $45 billion, a general increase since July 2012, when balances outstanding were $43.8 billion. However, the data displays seasonal variation, with relatively higher outstanding balances during some months of the year: see Figure 2.

13.4 m 13.6 m 13.8 m 14.0 m 14.2 m 14.4 m Number of

100 A significant area of focus in our review was the debt outcomes consumers experience with their credit cards.

101 We were concerned that consumers can carry large balances for extended periods at high interest rates, including balances that they have no prospect of repaying in the short-to-medium term (or that may cause financial harm in the future if their circumstances change).

102 Consumers can also face challenges selecting credit cards suited to their actual behaviours, in that: (a) behavioural biases may affect product selection and use, which means that consumers may choose a credit card because of certain features (e.g. interest-free periods and balance transfer offers) rather than a credit card with features that would suit their behaviours, resulting in additional costs; and

(b) differences in product features and terms can be difficult for consumers to assess.

103 In our review, we explored: (a) whether consumers have credit card debt that is causing them problems or has the potential to cause them problems in the future (we refer to this as ‘problematic debt’), and how this debt changes over time;

(b) whether some consumers have credit cards that are not suited to their actual behaviours; and

(c) what credit providers do in response to these issues.

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104 We also considered some aspects of current responsible lending assessments that may be relevant after the further requirements in the Banking Measures Act that relate to responsible lending commence from 1 January 2019.

105 Credit cards allow consumers to spread out the cost of their expenses over time and give them flexibility in how much of the balance owing they repay. Although credit cards are a useful tool, this flexibility has contributed to poor debt outcomes for some consumers.

106 There is no single definition for problematic credit card debt, and attempting to define it as a concept is challenging. For example: (a) looking at the total outstanding balance in isolation means the analysis will not consider if that amount is a significant debt for that consumer;

(b) examining behaviours at a single point in time means the analysis will lack context about whether a consumer’s usage pattern is for a short period or indicative of longer-term challenges; and

(c) reviewing each card in isolation means the analysis will not reflect total credit card debt outcomes where consumers hold multiple cards.

107 The effect of problematic debt on consumers can be financial: carrying large balances for a significant period at relatively high interest rates is expensive compared to other debt options. There can also be non-financial harms, such as reduced consumption or stress due to substantial or unaffordable debt.

108 In examining problematic debt, we looked at three scenarios: (a) Failure to make minimum repayments—We consider that not making the minimum repayments required (excluding short-term oversights) is clear evidence of debt that is causing problems for a consumer.

(b) Significant long-term debt—Consumers who carry substantial amounts of debt relative to their credit limit for a prolonged period are at risk of financial harm or more severe problems if their circumstances change. Stakeholders were concerned about consumers who use nearly all their credit limit and do not effectively repay their debt. The Senate Inquiry also expressed concerns about this behaviour, noting that some consumers have no prospect of repaying what they owe in the short-to-medium term.

(c) Small repayments—Where consumers make relatively small repayments for a prolonged period (e.g. the contractual minimum, or amounts near that minimum) the cost of credit card debt substantially increases, creating risks of financial harm if this occurs regularly.

Note: These scenarios broadly correlate with the types of problematic credit card debt identified by the FCA in its credit card market study: see FCA, MS14/6 Credit card market study: Final findings report (July 2016).

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109 To measure the prevalence of these scenarios, we developed four problematic debt indicators: see Table 2. These indicators reflect the three scenarios, with some additional conditions to filter out: (a) occasional variations in behaviour that do not detract from the overall risk of harm; and

(b) practices that may not cause problems, such as regularly carrying a large balance at no cost.

110 In developing these indicators, we looked at the different ways credit providers recorded and reported delinquency information and tested alternatives to identify accurate measures. We also conducted a data linking exercise to analyse a consumer’s debt situation across all their credit card accounts (rather than only an individual account-based assessment): see the appendix to this report.