Defined Terms and Documents

Consultation Regulatory Impact Statement - August 2008 - By the Consumer Credit Legal Centre (NSW) Inc

appreciate this opportunity to comment on practices in the market that seriously affect

thousands of consumers contacting our service, and to comment on proposals for reform.

Some of the submissions below have been copied directly from earlier submissions by the

CCLC on the same topic. These sections have not been specifically acknowledged.

Consumer Credit Legal Centre (NSW) Inc (“CCLC”) is a community-based consumer

advice, advocacy and education service specialising in personal credit, debt and banking law

and practice. CCLC operates the Credit & Debt Hotline, which is the first port of call for

NSW consumers experiencing financial difficulties. We provide legal advice, financial

counselling, information and strategies, and referral to face-to-face financial counselling

services, and limited direct financial counselling. CCLC took over 13,000 calls for advice or

assistance during the 2007/2008 Financial Year.

A significant part of CCLC’s work is in advocating for improvements to advance the

interests of consumers, by influencing developments in law, industry practice, dispute

resolution processes, government enforcement action, and access to advice and assistance.

CCLC also provides extensive web-based resources, other education resources,

workshops, presentations and media comment.

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Summary of submissions

4

Detailed Submissions

about irresponsible lending practices in the credit card market. The results of irresponsible

lending observed in our casework practice vary between aged and disability support

pensioners with spectacularly large credit card debts to more subtle problems, such as

consumers with modest credit limits and modest incomes, who can afford to meet their

minimum repayments but cannot pay off their account. We are appreciative of the

government’s consideration of this serious issue.

The extent of the Problem

CCLC has operated the Credit and Debt Hotline for just over 4 years since September

2004. In that time we have taken over 40,000 calls for assistance from consumers, most

often because they are in financial difficulty. While significant detail is recorded about only

about one quarter of those calls, credit cards have consistently been reported as the most

common cause of debt problems among callers. As shown in Table 1 below, there have 2.5

to 3 times as many calls about credit debt than the next most common type of debt in each of the four years.

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Credit card problems have featured so regularly in CCLC’s advice and casework assistance

that at least one case study about credit card lending has featured in the CCLC Annual

Report every year since at least 2002/03. Some of these case studies have been reproduced

in abbreviated form throughout this submission.

The Reserve Bank of Australia reported credit card debt nationally at a total of $44.6 billion

In CCLC’s experience, many consumers owe significantly more than the reported average, a

figure that is substantially distorted by the large number of accounts that are paid out fairly

callers to the CCLC between 1 September 2004 and 30 June 2006. The details reported

here were taken from 2,553 callers. While 500 callers owed $3000 or less, 2,005 owed

between $3000 and $80,000, with 48 owing more than $80,000. In fact the average amount

owed per person was $14,099, and the average amount owed on each card account was

$9,843, both significantly higher than the somewhat misleading national average. While a

similar analysis has not been performed more recently, anecdotal evidence from staff

suggests that these amounts have not been decreasing. In fact a very recent caller to CCLC

owed approximately $150,000 in credit card debt alone.

http://www.rba.gov.au/Statistics/Bulletin/C01hist.xls

Case Study 1 - CCLC Annual Report 2002/2003

Client had both a Visa Card and MasterCard with the one bank. Both cards were in arrears. The bank

cancelled the MasterCard due to the client’s erratic payment history and defaults on payments. The

Visa card account was at its credit limit when the MasterCard was cancelled. In fact for the 6 months

after the MasterCard was cancelled, there were 3 occasions when the client could not make the

minimum payments on the Visa Card and the client had exceeded the Visa Card credit limit.

Five months after the bank cancelled the MasterCard, the bank sent the client a letter advising that it

had pre-approved a credit limit increase to the client’s Visa Card. The pre-approved credit limit

increase was double the credit limit of the cancelled card. The bank said that it was offering the preapproved

credit limit increase on the basis that the client was a good customer.

No checks were carried out by the bank as to the client’s capacity to repay this amount, nor as to his

employment status. Further it is clear that the bank did not even check its own records on the

customer, as it would have discovered that it had cancelled the client’s MasterCard. The bank would

have also discovered that the client was struggling to pay Visa Card with its current limit. In fact the

client had a serious illness. Three months after the pre-approved credit limit increase the client

stopped working due to his illness and has not in fact been able to work since that date in 1997.

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Table 1 – Amounts owed on credit cards by callers to Credit and Debt

Hotline/CCLC between 1 September 2004 – 30 June 2006

Amount Owed Number of callers within range

Under $3,000 500

$3,000 - $5,000 460

$5,000 – $9,999 501

$10,000 - $19,999 528

$20,000 - 39,999 372

$40,000 - $79,999 144

Greater than $80,000 48

2004-2006 period, the caller’s income was low in 58% of cases (below $26,000 per annum)

and medium (below $52,000) in a further 15%. Three per cent identified an income level of

over $52,000 and the remainder (24%) did not specify their income level. This suggests that

although credit card debt is a particular burden for very low-income consumers, it certainly

extends into the middle-income bracket and beyond.

Another common misconception about unmanageable credit card debt is that it is a folly of

most commonly between 26 and 45 years old. Breaking this large age range down into

periods of seven years (as the 18-25 category represents), produces a result of 567 callers

per seven-year age group, over twice as many per seven-year range as for the 18-25 group.

While card debt drops off somewhat in the 45 - 60 category to 268 per seven-year age

group, this is still a slightly higher prevalence than in the 18-25 year category. Further, the

198 callers who had problematic debt and were over 60 years of age were particularly

worrying as a result of the limited (and often diminishing) income earning capacity of many

consumers as they age.

Table 2 – Age of callers to the Credit and Debt Hotline/CCLC between 1

September 2004 – 30 June 2006 where the primary problem was credit card

debt

Age of callers

Age range Number of callers

18-25 years 209

26-45 years 1530

45-60 562

Over 60 198

Insufficient information given 54

revolving credit product used to facilitate interest free purchases at major retail outlets.

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Lenders often claim that the major problem with credit card lending is not that consumers

are given unmanageable amounts on any particular card, but rather that they amass debts

across a number of cards that become unmanageable in total. The argument then goes on

to suggest that more comprehensive credit reporting would therefore address the credit

card problem more effectively than further regulation on lending practices. While it is

certainly true that consumers do accumulate a number of cards and, in some cases, card

CCLC analysis were having problems with only one card.

Table 3 - Number of credit card debts owed by callers to the Credit and Debt

Hotline/CCLC between 1 September 2004 – 30 June 2006

Number of cards held per debtor

Number of card Number of callers

1 1657 (65%)

2 456 (18%)

3 183 (7%)

4 76 (3%)

5 or more 47 (2%)

Insufficient information given 134 (5%)

A related problem with determining the extent and nature of problematic credit card debt

is the extent to which it is both obscured by, and exacerbates, other debt, particularly

mortgage debt. For example, 37% of callers indicated that they had other debts that were

contributing to their overall financial problems, including personal loans, mortgages,

telecommunications and other utility accounts. Further, many callers to CCLC indicate that

they have refinanced credit card debt into their home loan, sometimes more than once. In

refinanced their home loan to address financial difficulty and subsequently presented at a

consumer assistance agency in further financial difficulty. Within that group 8 sets of

borrowers had refinanced other unsecured debt into their home loan (in 10 different

credit reporting, see position paper available for download at

http://www.consumersfederation.org.au/creditreporting.htm

subsequent paragraph who had other types of debt was not conducted.

Case Study 2 - CCLC Annual Report 2003/2004

An elderly pensioner, Mrs. F, accumulated over $70,000 in credit card debt. This debt was held

across four cards with two different banks and Mrs F had been drawing from one card to pay the

other. Any of the four debts alone were beyond the client’s capacity to pay. CCLC negotiated a

massive reduction in the debt and a repayment arrangement for Mrs. F. Mrs. F would undoubtedly

have had to go bankrupt without the assistance of CCLC.

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evidence was supported by lenders mortgage insurer, Genworth Financial, in its submission

to the Commonwealth House of Representatives Inquiry into Home Lending Practices and

Processes:

“Commonly we come across many situations in which borrowers obtain significant consumer

debt after acquiring the mortgage in order to buy household goods such as plasma TVs,

motor vehicles and other household consumables. The increased financial burden associated

with this additional consumer debt often triggers a move to refinance both the consumer

debt and the original mortgage loan into a new mortgage facility. Genworth Financial has

witnessed a significant difference between the probability of default for an owner-occupied

loan that has been refinanced in an endeavour to consolidate debts, with the latter having a

The above problem was facilitated and fuelled by rapidly rising property prices and a highly

competitive, yet largely unregulated, mortgage broking industry. More recently, as housing

prices in some areas decreased and mortgage stress increased due to rising interest rates

and other price increases, larger proportions of income have been required to service

mortgage debt, resulting in a reliance on credit cards to meet day-to-day expenses. For

some of these borrowers the very recent reductions in interest rates have come too late,

repayments on the former. A recent presentation by Insolvency Trustee Service of Australia

addressed the options available for a growing group of debtors who had nil or negative

In short, non-mortgage consumer debt (in our experience largely credit card debt), has

been obscured by refinancing while housing prices experienced strong growth, has

contributed to mortgage default, and is more recently being used to temporarily mask real

levels of mortgage stress in the community.

later reported in Report by the Australian Securities and Investment Commission titled “Protecting wealth in

the family home: An examination of refinancing in response to mortgage stress”, released in March 2008

home lending practices and processes, by Genworth Financial, pp3-4, available to be viewed at

http://www.aph.gov.au/House/committee/efpa/banklending/subs/sub006.pdf

September 2008.

Recent calls to CCLC

A woman owed $290,000 on her home, estimated to be worth $310,000, over $30,000 on her car,

and $40,000 across four different credit card accounts that she had been using “to rob Peter to pay

Paul”. Another couple with young children could not pay their mortgage on their home unit due to

serious illness, and had accumulated $100,000 in credit card debt before they sought assistance.

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problems in the consumer credit market, despite the lower amounts

involved as compared to housing finance.

economy, credit card debt interacts with housing debt in obscure and

insidious ways, negatively impacting on the ability of many borrowers to

meet their mortgage commitments in the longer term.

The specific problems in the credit card lending practices

We consider that the irresponsible lending in the credit card market is systemic in nature

and includes the following factors:

1. Unsolicited limit increases are offered without any inquiry into the borrowers

current financial circumstances. In the last few years many lenders have “addressed”

this problem by asking borrowers to sign a brief document, or give recorded verbal

assurances over the phone, to the effect that they can pay an increased amount

without hardship.

2. Lenders have used repayment history as the main assessment criteria of future

ability to repay when offering limit increases. This does not take any account of any

change in income or circumstances, or indeed the borrower’s financial

circumstances at the point of initial approval for the account. For example, lenders

may not even review the original information given on the loan application form in

granting limit increases.

3. The assessment of ability to repay is based on the minimum repayment, not

repayment of the debt within a reasonable term. Minimum repayment percentages

are low meaning that higher initial limits and limit increases are offered.

4. Until recently. Many lenders have chosen to ask insufficient questions about

borrowers’ financial circumstances, and have chosen not to verify any of this

information. Some lenders have improved their practices recently, many now

requiring verifying documentation such as pay slips to be posted after giving

conditional internet approval, for example, but such improvements have not been

consistent across the market.

5. Structurally lenders are interested in creating debtors who are “revolvers” (keep an

outstanding balance) rather than debtors who repay each month in full because this

is more profitable for the lender. This means that responsible lending can be in

conflict with profit.

6. Lender’s may take comfort from home ownership, or the fact that the borrower is

purchasing a home and building equity, in their credit assessment process and place

less weight on the borrower’s capacity to repay the debt in full from their income.

This has serious consequences for the debtor who may be later forced into

bankruptcy to repay the debt, losing not only their home, but tens of thousands of

dollars in trustee fees.

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consumers to “self-certify” their ability to repay instead of conducting a satisfactory

assessment of capacity to pay is symptomatic of a wider problem of wanting to “tick boxes”

to cover the lender, rather than a genuine interest in the borrower’s circumstances. This is

to be expected given that responsible lending conflicts with increasing outstanding balances

on credit cards. In fact lenders own education initiatives aimed at improving financial

literacy, which encourage consumers to pay out credit card debt monthly, are at odds with

their marketing practices, which include offering additional credit to consumers who carry

cases from the facts presented, including 125 cases involving credit limit increase offers.

Only 53% of callers indicated a change of circumstances had occurred since the card limit

was granted. However, all 2,553 callers reported an inability to meet their repayments as

they fell due and/or a sense of despair as they were unable to significantly reduce their

balance despite long periods of paying as much as they could afford. This suggests that

unsustainable credit limit increase offers are only part of the problem, with low minimum

repayments (and hence higher initial balances), lack of verification of financial circumstances,

and possibly unrealistic assumptions about average living expenses (where these are

estimated by the lender) also playing a role.

Customers affected by less spectacular mismatches between their debt and their capacity to

pay can often suffer financial strain without ever missing a repayment. Further, they become

disheartened over time, as the goal of paying off the account recedes perpetually into the

future, and they become more likely to consider options such as debt consolidation, Part IX

Agreements and Bankruptcy. Importantly, the longer consumers carry a debt, the more

likely it is that the vicissitudes of life will intervene at some point in the lifespan of the debt

to reduce their capacity to pay even the minimum repayments as a result of accident, illness,

unemployment and eventually retirement. CCLC staff note that callers to the Hotline who

cite illness or unemployment or other similar changes of circumstances as the reason for

their inability to pay, will often admit that they have carried the balance on their account for

months, sometimes years, prior to the adverse event which finally tipped a sustained

problem over into crisis.

While credit card debt is unsecured credit, CCLC is aware of a number of cases where

card providers, or assignees of credit card debt, have attempted to bankrupt consumers

over credit card debt. This raises the questions of how much weight is given to home

ownership in bank’s credit scoring practices, compared to capacity to pay from income.

to the resultant impact on their ability to compete in the market. This demonstrates the importance of setting

uniform standards across the board so that lenders who behave responsibly are not penalised by the market.

was recently offered not only a credit limit increase, but also a “convenience cheque” equivalent to the

difference between the amount outstanding and the new limit.

about the caller’s income at the time the credit was granted, or the limit increased. This information is not

obtained in relation to every debt.

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All the above examples involve Citibank. In CCLC’s experience callers rarely report

bankruptcy proceedings commenced by other lenders. In fact CCLC has raised with

Citibank the notable predominance of calls of this nature received about Citibank debts, and

the fact that Citibank does not appear to exhaust the other enforcement options available

to it before commencing bankruptcy proceedings. While other banks do not, in our

experience, readily resort to bankruptcy proceedings in relation to unsecured debt, there

are debt collectors who purchase bank debt who are also inclined to take this course of

action. We are concerned that the practice of bankrupting consumers for unsecured debt

will increase as economic conditions decline.

Education is important but insufficient to ensure sustainable debt outcomes

Education can play a valuable role in empowering consumers to compare credit products to

determine the best value for money and to determine which products are most suitable to

their needs and circumstances. It can also assist borrowers to understand the consequences

of paying no more than the minimum repayment, and to know when and where to seek

Case study – Mr. B

In late April 2006, Mr B was served with a Bankruptcy Notice from Citibank over a debt of $14,000.

Mr B owned a house as tenants in common with the estate of his deceased wife. Mr B intended to

pay out the Citibank debt once probate was granted as his sons would then be able to borrow

necessary funds.

Case study – Mr M

In 2006, Mr M was served with a Creditor’s Petition over a $14,000 credit card debt. He never

received a Statement of Claim or a Bankruptcy Notice.

At the hearing, Mr M entered into in a repayment arrangement with Citibank but fell ill with heart

problems and was placed on a donor’s list. As a result he fell behind in payments.

Mr N owned his own property, but had a $140,000 mortgage with another credit provider.

Bankruptcy proceedings by Citibank would not only force the sale of this property, but would cost

him tens of thousands of dollars in trustee’s fees.

Case study – Mr N

Mr N obtained a credit card from Citibank. He fell behind in repayments and a Statement of Claim

was filed against him on 22 December 2005 for the amount just under $11,000.

In January 2006, Mr N offered a repayment arrangement of $200 per month. This offer was rejected

by Citibank who informed Mr N that Citibank wanted to place a lien on his properties.

Mr N then applied to the court to pay his loan by instalments of $400 per month. This offer was

accepted, and an Order to Pay by Instalments of $400 per month was made in March 2006.

Mr N made his first repayment one business day late. Citibank then served a bankruptcy notice on Mr

N demanding repayment of the full amount within 21 days.

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advice and assistance. However, education will never be sufficient to ensure sustainable debt

outcomes. Borrowers are often not in a good position to assess their ability to pay:

this assessment;

their job stability, and about their ability to live within a given budget (in

particular they do not allow sufficient funds for irregular events such as car

repairs or emergency travel);

affect their ability to pay;

used for day-to-day expenses as a result of inadequate income;

action to exclude the possibility of making an assessment of their ability to pay

dispassionately;

an emergency” and then find that their debt slowly creeps towards the limit

simply because it is available;

further credit to meet their immediate cash flow problems and to delay the

frightening consequences of their true financial position (sometimes in the hope

that things will somehow improve if they can just buy some more time).

We also submit that credit cards and other revolving debts present particular problems as

consumers are rarely likely to appreciate the cumulative effects of minimum repayments,

interest fees and charges, particularly default charges.

lending in the credit card market.

The need for responsible lending regulation to apply across the market

While CCLC is in favour of additional regulation of the card market, we submit that any

general responsible lending obligations need to apply across all forms of consumer lending.

Credit cards are the most common problem by far for callers to CCLC, but home loan

problems have been the fastest growing source of debt problems among callers for the past

the obvious benefits for borrowers who may otherwise find themselves overcommitted, it

is clear following the US sub-prime crisis that responsible lending needs to be regulated to

ensure future economic stability. Further, any attempt to regulate one part of the market

(credit cards) differently to another (personal loans, mortgages, lines of credit secured over

the home) is likely to result in innovation to create products that avoid the more stringent

obligations. Consequently, we welcome the announcement by the Federal Government

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that responsible lending regulation across all consumer lending products will be introduced

in Phase 1 of the transfer of the regulation of credit to the Federal Government.

in relation to credit cards.

The objectives of responsible lending legislation

It is essential that any responsible lending legislation meet two key requirements:

for lenders to review their practices carefully to ensure they do not lend

irresponsibly; and

In order to achieve this there must be:

afford to meet his or her commitments under a credit contract, or an extension of a

credit contract, without substantial hardship

circumstances, including their income, expenditure and other relevant commitments

verification of borrower information

and to avoid unnecessary bankruptcies.

Further, substantial hardship should be defined to include situations where the loan will not

be repaid within a reasonable time frame (see below) and where the borrower’s principal

place of residence would need to be sold to satisfy the debt.

review their practices carefully to ensure they do not lend irresponsibly;

and

consumers.

Unsolicited credit limit increase offers

Unsolicited offers of additional credit have the potential to seduce borrowers into taking on

more debt than they can comfortably afford to repay (and would not necessarily have

otherwise applied for), and can be particularly attractive to consumers already experiencing

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cash flow problems. Consumer agencies regularly report cases where consumers have

taken on credit card debt far in excess of their ability to repay as a result of credit limit

increases. Personalised offers of additional credit are particularly attractive to consumers.

They imply that the consumer has been assessed as “worthy” and can therefore afford the

increased limit. They also suggest to the consumer that additional credit will give them

extra security (“just in case you need it”), luring consumers into ignoring the real risk that,

Consumers should have to make a conscious decision to apply for credit and to request the

amount of credit they consider appropriate (the latter would of course then be subject to

the lender’s usual lending criteria and a lower limit than requested could be granted if

appropriate). This is consistent with the objective of improving financial literacy in the

population generally and encouraging greater consumer engagement with their financial

decisions. For this reason, CCLC supports Option 6.2 of the RIS that borrowers should be

able to nominate their own credit limit (subject to proper assessment by the lender). CCLC

also submits that unsolicited credit limit increase offers should be prohibited. In the

alternative, credit limit increase offers should be prohibited to any consumer who has not

preceding 12 months.

consumer who has not paid out their account in full in the most recent

Increasing minimum repayment percentages for new credit card contracts and

for offers of increased credit limits in current cards (Option 6.6 and Option 6.3)

CCLC is in favour of increasing minimum repayments on new credit card accounts, and in

association with credit limit increase offers. CCLC is strongly opposed to increasing the

minimum repayments on existing accounts. This is discussed in greater details in the next

perspective see Congratulations You’re Pre-approved! An anlaysis of credit limit upselling letters by

Consumer Action Law Centre, available for download at

http://www.consumeraction.org.au/publications/policy-reports.php

Case study 3 - CCLC 05/06 Annual Report

A client from a non-English speaking background on Centrelink benefits obtained a credit card from a

major bank. Over the next few years she was sent several unsolicited limit increases, resulting in her

experiencing severe financial hardship as a result of servicing the loan.

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Increasing minimum repayments on new credit cards, and as a condition of credit limit

increase offers, has the potential to reduce over-indebtedness in the future in two ways:

Of course, borrowers should be clearly informed of the consequences of this change when

opening a new account or accepting an increased limit with specific disclosure of the

minimum repayment that would be required if the account were fully drawn to its limit.

Reducing the time taken to repay debt is a worthy goal in itself. It reduces the total interest

paid by the consumer, and reduces the likelihood that s/he will encounter a change of

circumstances rendering him or her unable to repay the debt. This is a better result for an

empowered, financially “in control” population, that maximises the income people have

available to meet their ongoing living expenses, and in some cases frees up discretionary

income for further spending, stimulating the economy. From a common sense perspective,

most people would simply not want to be paying off their credit card debt for years after

they have stopped using the card. Our experience suggests that most people in this

situation currently did not realise in advance that this would be the consequence of their

credit card use.

Minimum repayment percentage Time to pay in years & months Interest paid

1.5% 67 yrs 3 mths $14,934

2% 28 yrs 2 mths $5,288

2.5% 19 yrs 1 mth $3,253

3% 14 yrs 9 mths $2,364

3.5% 12 yrs 2 mths $1,851

4% 10 yrs 5 mths $1,527

statement despite the debt diminishing and the repayment reducing as a consequence.

the initial minimum repayment, rather than reducing their repayment along with the

minimum payment shown on their statement.

all, on the borrower's ability to meet the minimum repayment on the fully drawn balance. While this

submission advocates ensuring that the time taken to repay a debt in full is also a fact in credit assessment,

increasing minimum repayments alone would also reduce the credit limit offered to a borrower with a

particular amount available for credit repayment after other expenditure.

submission have been calculated using ASIC’s credit card calculator available at

approximation is involved due to rounding off of both months (time to pay) and currency.

significantly lower than many of the debts reported to CCLC.

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Table 5 – Time to pay debt as a function of minimum repayment percentage

where initial minimum repayment maintained

The following assumes a debt of $3,500 and an interest rate of 15%

Minimum repayment percentage Time to pay in years & months Interest paid

1.5% 11 yrs 9 mths $3,938

2% 6 yrs 8 mths $2,023

2.5% 4 yrs 8 mths $1,369

3% 3 yrs 8 mths $1053

3.5% 3 yrs 1 mth $853

4% 2 yrs 7 mths $723

Minimising the time to repay a debt is arguably good for credit providers also, because it

reduces the level of bad debt carried by the credit provider. However, it can also be argued

that it is of little consequence to the credit provider how long the consumer pays the debt

for, and whether the debt ultimately goes bad, provided the credit provider has recovered

credit provider. In this way the interests of consumers and credit providers diverge, and

there is less motivation for the credit provider to promote this result without specific

regulatory guidance.

Table 6 – Minimum repayments rates and interest rates available on the market

Note, the minimum repayment schedule for NAB card is based on a minimum credit limit if $500,

but $1,000 for all other cards.

Credit card provider Min Repayment % Retail purchases interest rate

ANZ Low Rate Mastercard 2.0% > $10 12.99%

ANZ First Visa 2.0% > $10 19.99%

Bendigo Basic Black 3.0% > $10 10.75%

Citibank Clear Visa 2.0% > $30 12.49%

Commonwealth Awards $25 20.14%

Commonwealth Low rate $25 12.64%

Bank SA Vertigo MasterCard 2.0% > $10 11.89%

Bank SA Starts Low Stays Low 2.0% > $10 12.99%

David Jones Amex 2.5% > $30 20.49%

David Jones Store Card 2.1% > $10 24.49%

GE CreditLine 3.0% > $40 29.49%

Myer Visa 2.2% > $10 19.99%

NAB Low Rate Visa 2.5% > $10 12.70%

NAB Visa Mini 2.5% > $10 19.74%

St George Starts Low Stays Low 2.0% 12.99%

St George No Annual Fee 2.0% 18.75%

Westpac Altitude 2.0% > $10 20.74%

Westpac Earth Card 2.0% > $10 17.99%

balance accounts.

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The benefits of increasing minimum repayments must also be balanced with the need to

ensure access to credit as far as is practicable for consumers on low incomes. While

nonetheless lower than on most forms of alternative finance for small amounts (<$5000).

Ideally, low-income consumers should have access to low-rate, low-credit limit credit card

accounts if they choose to do so and can demonstrate the capacity to repay the debt.

In our experience it is not uncommon for social security recipients to have $50 per month

available for credit repayment. Of course this fact cannot be assumed and must be

determined on an individual basis. Borrowers with higher than usual housing costs, other

debts, or medical expenses, for example, may have no income available for credit

repayment, and those with no, or very low, housing costs may have considerably more.

percentages by a person with $50 per month available for debt repayment.

Table 7 - Credit limit available by minimum repayment percentage at

repayments of $50 per month

Minimum repayment Credit limit

2% $2,500

2.5% $2,000

3% $1,650

3.5% $1,420

4% $1,250

However, considering the amount able to be borrowed at a particular minimum repayment

percentage is only part of the equation. To ensure that low-income people are not being

locked into a debt trap it is also necessary to consider the amount of time taken to repay a

particular credit limit if fully drawn and the interest paid over that time.

Table 8 – Time taken to repay debt at $50 per month and interest paid.

Int.

10.8% 14.3% 20.7% 24.5% 29.5%

Credit

limit

Time

To

pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid

1,250 2y5m 171 2y6m 242 2y10m 402 3y0m 517 3y4m 713

1,420 2y9m 226 2y11m 322 3y4m 550 3y8m 726 4y2m 1,047

1,650 3y4m 313 3y7m 459 4y2m 813 4y8m 1,121 5y10m

th

1,779

2,000 4y2m 485 4y7m 728 5y9m 1,429 7y1m 2,196 14y3m 6,516

2,500 5y7m 837 6y5m 1,315 9y9m 3,305 Indef. Infin. Indef. Infin.

decreases in the cash rate being passed on to home loan borrowers but not necessarily to those with credit

card accounts.

are rounded off to accommodate the limitations of the ASIC credit card calculator.

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Repayment will exceed 4yrs at $50 per month

Repayment will exceed 5yrs at $50 per month

Interest paid will exceed credit limit (amount borrowed)

Debt will never be repaid at $50 per month

able to pay 2% of the credit limit (a very common minimum repayment rate), it takes over 5

years to repay at approximately 10-14%, nearly 10 years at about 20% with more interest

paid than the amount borrowed, and the debt will never be repaid at 24.5% or higher

interest rates. Even at a minimum repayment of 2.5% of the credit limit, interest rates of

24.5% or higher result in more interest being paid than the amount borrowed. Moreover, as

the following Tables demonstrate, these relationships (between the interest rate, the

minimum repayment rate and time to pay) are more or less constant, regardless of the

amount available to repay the debt.

Table 9 - Credit limit available by minimum repayment percentage at

repayments of $100 per month

Minimum repayment percentage Credit limit

2% $5,000

2.5% $4,000

3% $3,330

3.5% $2,850

4% $2,500

Table 10 – Time taken to repay debt at $100 per month and interest paid.

Int. rate 10.8% 14.3% 20.7% 24.5% 29.5%

Credit

limit

Time

To

pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid

2,500 2y5m 345 2y7m 486 2y10m 800 3y1m 1034 3y5m 1425

2,850 2y10m 458 3y0m 653 3y5m 1,107 3y8m 1465 4y3m 2119

3,330 3y5m 646 3y8m 938 4y3m 1665 4y10m 2308 5y11m 3690

4,000 4y3m 980 4y8m 1466 5y10m 2849 7y1m 4400 14y1m 12813

5,000 5y8m 1,673 6y6m 2,650 9y9m 6,606 Indef. Infin. Indef. Infin.

Repayment will exceed 4yrs at $100 per month

Repayment will exceed 5yrs at $100 per month

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Interest paid will exceed credit limit (amount borrowed)

Debt will never be repaid at $100 per month

Table 11 - Credit limit available by minimum repayment percentage at

repayments of $500 per month

Minimum repayment percentage Credit limit

2% $25,000

2.5% $20,000

3% $16,650

3.5% $14,280

4% $12,500

Table 12 – Time taken to repay debt at $500 per month and interest paid.

Int. rate 10.8% 14.3% 20.7% 24.5% 29.5%

Credit

limit

Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid Time

To pay

Int. paid

12,500 2y6m 1,725 2y7m 2,430 2y10m 3,999 3y1m 5,169 3y5m 7,132

14,280 2y11m 2,301 3y1m 3,280 3y5m 5,558 3y9m 7,366 4y3m 10,655

16,650 3y5m 3,231 3y8m 4,687 4y3m 8,326 4y10m 11,528 6y0m 18,500

20,000 4y3m 4,905 4y8m 7,330 5y10m 14,238 7y1m 21,968 14y2m 64,206

25,000 5y8m 8,364 6y6m 13,240 9y9m 33,010 Indef. Infin. Indef. Infin.

Repayment will exceed 4yrs at $500 per month

Repayment will exceed 5yrs at $500 per month

Interest paid will exceed credit limit (amount borrowed)

Debt will never be repaid at $500 per month

maximum balance, would always take over 5 years to pay (assuming the borrower cannot

afford to pay more than this) and result in more being paid in interest than the amount

borrowed, even when the initial repayment is maintained (not reduced along with the

balance) and irrespective of account keeping fees (routinely applied) or penalty fees for late

or missed payments. A David Jones store card at 24.49%, assessed at a minimum repayment

of 2.1%, would usually take over 14 years to pay and cost multiples of the amount

20

balance, would take over nine years to pay and cost more than the amount borrowed in

interest. By contrast, the Bendigo Basic Black product, at 10.75% per annum and assessed at

3% of the maximum balance, would take under 4 years to repay and cost less in interest

One possible policy response to this would be to increase the minimum repayments on all

accounts to 4%. This would have the effect of limiting a person with $50 per month

effective for interest rates higher than 30%.

Another possible response would be to increase repayments rates to 3% or 3.5% or 4%,

but also specify that the borrower should have the capacity to repay the debt in less than 4

years. This would enable a borrower with $50 per month available for to borrow $1,650

$1,420, or $1,250 respectively, but would only allow the amounts at the higher end of the

range to be borrowed at lower interest rates (for example 14.3% or less). This method

would also better accommodate a rising interest rates environment, by reducing the

amount able to be borrowed as interest rates increase. It would not assist borrowers who

are already in debt at the point where interest rates increase.

Having done the calculations presented in this submission, CCLC has concluded that the

suggested requirement that credit card debts must be assessed as to be repaid within seven

years referred to in the discussion paper would not make a significant difference to current

lending practices or consumer hardship. A review of the data presented above reveals that

even debts paid off in less than seven years can result in more interest being paid than the

preferable to seven, it still results in some circumstances in the borrower paying 70% or

side in setting this limitation because these calculations, as noted previously, do not take

into account the cumulative effects of fees and charges, nor the effect of making only

minimum repayments (as opposed to maintaining the initial minimum repayment). CCLC

submits that setting the required time to pay at 4 years for credit assessment purposes

strikes the right balance between allowing reasonable access to credit and committing

unwary consumers to a debt trap.

CCLC’s preferred option is to set minimum repayment rates at 3% on new accounts or

extensions of existing credit limits, but to also require the borrower to have the capacity to

repay the debt within 4 years. This maximises the amount a low-income earner can borrow

at lower interest rates, while also working to prevent the debt traps which occur at higher

Credit Card Calculator.

other applicable charges, have not been taken into account in these calculations.

pay 3% of the outstanding balance would take close to 6 years to repay at 29.5% and cost more in interest

than the amount borrowed, provided the borrower maintained the initial minimum repayment.

21

interest rates. More importantly, a debt assessed at a minimum repayment of 3% at a cost

of 10.8% per annum or 14.3% per annum will cost less to repay than a debt assessed at 3.5%

or 4% at a cost of 29.5% per annum. Low-income consumers should not be given the

opportunity to access expensive credit whilst being denied cheaper credit that can be repaid

within a similar time frame and at a lower cost. Increasing minimum repayments alone

would have this effect.

A similar policy objective could be achieved by simply requiring the credit to be able to be

repaid within 4 years and not changing minimum repayment levels. CCLC is opposed to this

option because of the highly negative consequences of paying lower minimum repayments

the preceding paragraph strike the optimum balance between ensuring credit limits are

sustainable and maximising access to credit for low-income borrowers within reasonable

parameters.

Another option that has not been considered in the RIS is changing the minimum repayment

to a percentage of the credit limit, rather than the balance outstanding. This could be

expressed as, for example, 3% of the credit limit, or the amount outstanding, whichever is

the lesser. This would certainly address the problem of borrowers who continue to pay the

minimum repayment as the debt reduces, resulting in repayment periods stretching beyond

a normal human lifespan. This would, however, be a radical shift in how credit cards are

offered, and would diminish flexibility for consumers who may have erratic income and

expenditure patterns but adequate income to repay their debt within a reasonable

timeframe. At this stage, CCLC favours education and specific disclosure by lenders to

address this issue as discussed at Option 6.5.

new credit card accounts, and as a condition of any credit limit increase

offer (should credit limit offers continue to be permitted).

when opening a new account or accepting an increased limit with specific

disclosure of the minimum repayment that would be required if the

account were fully drawn to its limit.

borrower has the capacity to repay the fully drawn credit limit on an

account within four years, assuming no further drawings are made and

the customer pays the maximum they can realistically afford in each

payment cycle. Assessment of capacity to pay the minimum repayment

alone should not be sufficient to comply with responsible lending

legislation.

Minimum repayments percentages on existing card accounts

As noted above, credit cards are the biggest source of debt problems for callers to our

service. In some cases these cards have been issued, or limits increased without any real

regard for the caller’s capacity to repay and increasing the minimum repayment

retrospectively would exacerbate such debtors’ existing difficulties. Further, in those cases

where an assessment of capacity to repay was undertaken, it was usually done on the basis

22

of the consumer’s ability to meet the existing minimum repayment on the fully drawn

balance. Increasing the minimum repayment in existing accounts could therefore place such

consumers in a position where they could not meet their minimum repayments, resulting in

default, an outcome that is undesirable for lenders and borrowers alike.

While some borrowers are currently in the position that they are meeting their minimum

repayments and yet not reducing their debt, or not significantly reducing their debt, such

borrowers should be given the opportunity to take action to address this problem in their

own time (by changing their income or expenditure, seeking hardship assistance, an informal

settlement with the credit provider, or the options available under the Bankruptcy Act). It is

inequitable to change the terms of repayment retrospectively. It is also not in the public

interest to pursue a policy that could result in a sudden surge in defaults, particularly amid

the current economic turmoil in money markets worldwide.

However, existing cardholders should be given the option to increase their minimum

repayment to 3% at any time, to bring their repayment requirements in line with new

accounts. Further, there should be a set period (perhaps 3 years) after which no further

draw downs should be allowed on existing accounts (repayments can continue at the same

rate), with borrowers who qualify for new accounts with higher minimum repayments (and

possibly lower credit limits depending on the circumstances of the customer) being moved

across as appropriate.

minimum repayment to 3% at any time

draw downs should be allowed on existing accounts, with borrowers who

qualify for new accounts with higher minimum repayments being able to

apply for alternative products as appropriate

Other credit assessment issues

The CCLC analysis of credit card callers found that 844 people on government benefit

owed over $3,000 in credit card debt. While sufficient details was not available to

determine how many of these people were in the group who had experienced a change of

circumstances since being granted credit, anecdotal evidence from staff suggests that it is

not uncommon for social security recipients to be granted up to $3,000 in credit.

Int. rate 10.8% 14.3% 20.7% 24.5% 29.5%

Credit

limit

Time to

pay

Int. paid Time

to pay

Int. paid Time

to pay

Int. paid Time

to pay

Int. paid Time to

pay

Int. paid

3,000 5y7m 1,004 6y5m 1,589 9y9m 3,966 Indef. Infin. Indef. Infin.

minimum repayment amount of 2%.

23

Ironically, many callers to CCLC who are on social security, including aged pensioners, have

accounts attracting 24-29.5% interest. According to the minimum repayment level of 3% on

a GE Creditline Account, for example, people with $50-60 dollars available for debt

repayments should not qualify for a credit limit of $3,000 (because the minimum repayment

would be $90), and yet, even accounting for some borrowers whose circumstances have

changed, these limits are apparently being granted, at least in some cases.

The possible explanations for this are:

the amount available for credit repayment, and/or

expenditure are not good indicators of actual expenditure, and/or

done to detect this.

Accordingly, CCLC submits that:

about income and expenses, including other credit commitments and housing

expenses to adequately assess capacity to pay;

prevent underestimation of day-to-day expenditure by consumers, actual expenses

should also be requested;

consumers, particularly income information. Even if verification is not requested on

requested on a sufficient number of applications to ensure that it is always a

accuracy for lenders across the whole portfolio and sends a message to consumers

that the lender is interested in their actual circumstances, as opposed to whatever it

takes to tick a box and justify granting the loan.

CCLC does not propose that the legislation should dictate the processes by which lenders

should obtain the above information, the weight given to any particular piece of information,

or what else the lender should take into account in developing their credit scoring/risk

management tools. On the contrary, the legislation should focus on the outcome, that being

that credit providers should take responsibility for making a genuine attempt to assess

capacity to pay, and the consequences in terms of penalty and remedy.

finance, or any loan secured over the borrower’s home.

Case Study 4 – CCLC Annual Report 2004/2005

Mrs. B telephoned CCLC as she wanted assistance to declare bankruptcy. Mrs. B was over 80 years old

and living with her husband in a retirement village unit, which they had purchased together. Mrs. B had 8

credit card debts that together exceeded $100,000. The CCLC financial counsellor discussed the impact

of declaring bankruptcy with Mrs B, particularly the implications for the unit she owned jointly with her

husband. After extensive negotiations a settlement was agreed with all 8 creditors with funds made

available by the client’s family.

24

a borrower’s income, expenses and liabilities

to prevent consumers from underestimating expenditure, they should

not be used to assume the amount available for credit repayment

at least a significant number of accounts

Improved coordination and collection of data from financial counselling and

related agencies

Finally, CCLC has had the opportunity of reviewing the submission of the Centre for

Commercial Law and Care Inc Financial Counselling Services and supports the comments

made in relation to improvements in the collection and collation of data from financial

counselling and other related agencies.

Table 6 References (Footnote 19, Page 16)

compare-credit-card-rates.html

Minimum repayment information was obtained as follows:

ANZ credit cards - Conditions of Use, p.18<<http://www.anz.com/documents/AU/about

ANZ/CreditCardCondUse1.PDF>> 05/05/08,

Bendigo Basic Black - Call to Bendigo Bank (1300 366 666) on 05/05/08,

Citibank Clear Visa - Call to Citibank (13 24 84) on 05/05/08,

Commonwealth Bank credit cards - Call to Commonwealth Bank (13 22 21) on 05/05/08,

Bank SA credit cards - <<http://www.banksa.com.au/credit-cards/tools-faqs/repayments.

asp>> 05/05/08,

David Jones cards - Call to David Jones American Express Card (1300 36 89 89) on

05/05/08,

GE Creditline - Call to GE Money (1300 131 024) on 05/05/08,

Myer Visa - <<http://www.myer.com.au/cards/ terms-conditions.asp>> 05/05/08,

NAB credit cards - www.nab.com.au/Personal_Finance/0,,76984,00.html>> 05/05/08,

<<http://www.nab.com.au/Personal_Finance/0,,60233,00.html>> 05/05/08,

St George credit cards - Credit Card Conditions of Use, p.19

<<http://www.stgeorge.com.au/resources/sgb/downloads/accounts_and

cards/sgb_credit_cards_conditions_050808.pdf>> 05/05/08; call to St George Bank (13 33

30) on 05/05/08,

Westpac credit cards -

<<http://www.westpac.com.au/internet/publish.nsf/Content/PBCCCSCR+Interest+ rates>>

05/05/08; call to Westpac customer service (1300 651 089) 05/05/08.