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How long is too long to spend paying off a credit card debt?
Consumer advocates are pushing for rules that would force banks to only issue
cards with credit limits that customers could repay within three years, as the
government seeks to tighten lending standards in the $52 billion market.
Banks and other card issuers, however, maintain it is "reasonable" to approve a
card limit that could be repaid in up to 10 years, arguing only a small minority
of consumers get into trouble with debts racked up on plastic.
The question is being debated as part of a government push to address credit
card debt traps.
These can occur with credit cards because their very low minimum repayments mean
some customers can spend years paying off minimal principal as their debt
attracts interest rates of around 20 per cent a year.
Draft legislation would force banks to only issue credit limits that could be
repaid in an unspecified "reasonable" period, alongside a ban on banks making
unsolicited offers of credit limit increases.
That contrasts with current rules, which say credit card contracts are
"unsuitable" if a customer cannot repay the loan without "substantial hardship",
such as being forced to sell their house to pay off the debt.
The Consumer Action Law Centre backed the reforms, but said banks should only
approve limits that could be paid in three years. This would encourage consumers
to use cards as a short-term source of finance, rather than long-term debt, it
said.
Three years was still "generous" for banks, it said, pointing out that paying
back a $10,000 debt over three years at an interest rate of 20.4 per cent
would mean paying more than $3000 in interest." A three-year assessment rule
should provide a sufficient amount of credit for consumers to use credit cards
for necessary purposes, while at the same time preventing debts from growing to
the point where they become an unmanageable long-term debt obligation," it said
in a submission.
"A three-year assessment rule should provide a sufficient
amount of credit for consumers to use credit cards for necessary purposes,
while at the same time preventing debts from growing to the point where they
become an unmanageable long-term debt obligation," it said in a submission.
Even so, banks are hesitant to put such a cap on the lucrative credit card
market.
The Australian Bankers' Association's submission warns of "significant
unintended consequences" of the rules as they are drafted, saying they could
mean some borrowers would have their credit limits cut.
It said it would discuss with Treasury what was a "reasonable" repayment
period for card debt to be repaid. Other banks did not provide their
submissions on the draft legislation, but earlier submissions from banks
have pushed for a much longer time frame than three years.
Westpac told Treasury in June that seven years was a reasonable repayment
period, because this is the typical term of a personal loan. The bank's
argument was that most customers used cards as a short-term way of smoothing
their cash flow, with 98 per cent of customers paying more than the minimum
repayment.
The Customer Owned Banking Association also said in June it thought a period
of up to 10 years was reasonable, and pushed for low-limit cards to be
excluded from this rule change, so that lower-income borrowers were not
denied credit.
The reforms come after previous
Treasury research found a "significant minority" of credit card
consumers were being wrongly given credit cards, which they then used in
ways that left them suffering a "large burden on their financial and general
wellbeing".
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