Credit card bankruptcies could be the next banking scandal

Updated 29 Sep 2016, 9:42am

PHOTO: Credit card balances have fallen but debt consolidation loans have jumped. (AAP: Alan Porritt)

MAP: Australia

Credit cards are rapidly becoming one of the most common causes of personal bankruptcy, and there are indications that the major banks have been granting inappropriate credit limits, possibly breaching responsible lending laws.

University of Canberra lecturer and former financial counsellor Gregory Mowle has interviewed 26 bankrupts as part of his PhD research into personal bankruptcy.

Most finger the plastic for their financial woes.

"They say credit cards are very dangerous, we don't like credit cards," Mr Mowle told ABC's The Business.

"We'd actually prefer to go to a payday lender, because at least that's over a fixed term, it's going to be paid off over say six months."

Mr Mowle's research is backed up by the experience of Victoria's Consumer Action Law Centre.

"Around half the people that contact us actually have credit card debt of over $10,000," said the centre's chief executive Gerard Brody.

"Many have many thousands more than that in credit card debt and, in fact, we've worked out that at least one person a week that contacts our centre has credit card debt of more than $100,000."

Mr Mowle said many people were stuck on a credit card "merry-go-round".

"They would use, sometimes, the credit off one credit card to make the minimum monthly repayment off the other credit card," he said.

"They actually made that work for a long period of time, in some cases three or four years, but eventually it just takes one little thing for that house of cards, excuse the pun, to completely fall down."

Pensioner pursued for card debts after already losing home

It is an experience that many people the ABC spoke to can identify with.

Mary* asked for her identity to be concealed because she only just reached a deal with her bank to clear her debts.

It was mainly investment property loans that got Mary into financial trouble, but her $14,000 credit card debt proved almost as difficult to resolve.

After being forced to liquidate her investment properties and sell her own home to repay her loans, Mary was still inundated with calls from her bank's overseas call centres about the card debt.

"The 40 phone calls, that was during working hours while I was trying to work, four or five calls a day, and then on Saturdays and on Sundays," she said.

"It wasn't very pleasant at all."

The experience was all the more galling because Mary did not even ask for the card in the first place.

"That came with the investment loan — it was a $25,000 limit and I didn't want it," she said.

It has become common practice for banks to push credit cards onto home loan customers.

After years of battling the bank, Mary said it took the eventual intervention of the financial ombudsman and repeated pleas to various bank officers, right up to the chief executive, to have her matter resolved.

"I had sold my own home — I would get nothing out of that because during the time that I had borrowed money from different people I'd paid all those monies back — there was nothing left," she explained.

"That's why I had to sell the car, 'cause I was only on the pension at that stage and I didn't have any money for that.

"So the bank officer agreed to take the credit card and wipe that as well. What else were they going to do?"

Mary should not have been approved for the home loan in the first place, let alone the credit card on top of it.

The ABC has seen loan documents that put her income at $500,000 per annum.

While she had earned $24,000 in a single month, Mary was on commissions and did not earn anything many other months.

She said her annual income was closer to $50,000 — something the bank should have known, given that all her accounts were with them.

'Compulsory' credit cards thrust onto home loan customers

Mary is far from alone.

Denise Brailey, who runs the Banking and Finance Consumers Support Association, sent out an email to her members and found many had been issued credit cards without requesting them.

"I was told I have to take the credit card as part of the [home loan] package even if I don't use it, as it's compulsory," replied one of the survey respondents.

Like Mary, many of them ended up using the card to try and keep up their mortgage repayments once they started falling behind.

Some say they were actively encouraged to do so.

"Our broker went into the fact that everyone uses Mastercard/Visa to pay loans and the benefits of doing so in rewards, etc," said another respondent.

Pensioners get up to $80,000 credit limits

The ABC has spoken to a police officer with credit card limits totalling around $150,000 — more than one-and-a-half times his annual pay.

He racked up about $65,000 in debts with different card providers — mostly subsidiaries of the major banks — and is still trying to figure out how he will repay them.

Even welfare recipients are receiving eye-watering limits, such as this case that shocked Gregory Mowle.

"Someone was on a government pension, earning a total of say $25,000 a year, but they were assessed to have credit cards debts or credit card limits of $80,000. This is just extraordinary."

Mr Mowle said it is commonly the major banks and big credit card providers engaged in this behaviour, which he believes is against the law.

"When you have a debtor who has two or three credit cards with the same provider and, even within the same provider the credit cards are totalling $30,000 or $40,000, and they know that the debtor is on a low income or a government pension, I mean I just simply cannot believe that they have complied with the responsible lending obligations," he added.

Consumer protection groups want the responsible lending laws strengthened so that credit card limits are not assessed on whether someone can just meet the minimum repayments — which could leave them in almost perpetual debt.

"So that lenders, before advancing a credit card or increasing a limit, must make an assessment about whether the borrower can repay that credit within a reasonable period," said Mr Brody.

"And we think that period should be three years at the very most."

Debt consolidation loans surge as card balances fall

Debt consolidation loan approvals have averaged $886 million per month so far this year, up 68 per cent from $527 million per month last year.

The rise in such personal loans is so rapid that they now dwarf lending for household goods and are rapidly catching up to car lending.IFM Investors chief economist Alex Joiner said he is no expert on these particular figures, which are not well covered by economists, but they seem to indicate a couple of trends.

"I would think that the banks have been pushing this as a product or similar, or that there is an increasing amount of distress amongst some households pushing them towards these products," he theorised.

Most of these loans are taken out to consolidate credit card debts, because they generally have a lower interest rate and offer fixed monthly repayments that reduce both principal and interest.

However, Gregory Mowle warned that they can leave people in more financial stress if the bank issuing the loan does not ensure that all the credit cards being paid off are cancelled.

"If someone is consolidating credit cards belonging to another lender, there has to be an agreement that those cards are closed down, not just paid off but cancelled," he said.

While there has been a $5 billion reduction in Australian credit card balances that are attracting interest over the past four years, the rapid increase in consolidation loans tends to indicate that this debt has simply been shifted, not repaid.

Mr Mowle also said that many banks appear to be issuing debt consolidation loans to customers who still cannot afford to repay them, or who might be eligible for part or all of their debts to be forgiven.

"It's a real conflict of interest, because the staff in those branches are on a commission scheme, they get a bonus, they have targets for the amount of loans they need to be writing for each month," he said.

"Major credit card providers will provide assistance, it's there in the legislation.

"So they'll say, well look, you can make half the regular payments, or we can defer some monthly payments, or we can reduce the interest rates, or we'll refer you to the financial counsellor."

Mary's deal with her bank staved off bankruptcy, but she has been left living with friends and her retirement dreams are in tatters.

"I'm more or less living out of a suitcase. My health's suffered," she said.

"The bottom line is I have got friends who are helping me and, really, I'm probably better off than a lot of people."

*Not her real name.

You can watch Michael Janda's story on The Business at 4:30pm or 8:30pm (AEST) on News 24 or 11:00pm (your local time) on ABC.

If you have more information on this story you can contact Michael via Twitter @mikejanda.