- Australians owe $45 billion on credit cards.
- ASIC reviewed 21.4 million credit card accounts opened between July 2012 and June 2017.
- The regulator concluded 18.5% of consumers, around 1.9 million, struggle with credit card debt.
In June 2017, around 550,000 people were in arrears, another 930,000 had persistent debt, plus 435,000 more repeatedly repaid small amounts.
Credit cards are a lucrative business for lenders, but nearly two million Australians are trapped in debt cycle amid $45 billion worth of outstanding card debt.
Corporate regulator the Australian Securities and Investment Commission (ASIC) has released the results of its review into credit card lending between 2012 and 2017. It concluded that people are being given cards that don’t meet their needs and most credit providers don’t do anything to address issues such as persistent debt, low repayments or poorly suited products, despite new rules introduced in 2012.
As a result, ASIC is looking at a further crackdown on the sector to make it more responsive to the issues it identified, and is looking at a new requirement to strengthen responsible lending practices.
ASIC also wants to cap credit limits so they can be repaid within three years.
The regulator pointed the finger at four lenders — Citi, Latitude, American Express and Macquarie — which retained grandfathered rules when changes in 2012 required lenders to apply repayments to debts with the highest interest rate. ASIC estimates almost 525,000 consumers paid more interest as a result.
“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,” the ASIC report says.
Citi and Macquarie plan to change their practices next year as a result of the new Banking Code of Conduct. American Express has indicated it plans to change in 2019 too, and Latitude its considering its position.
ASIC deputy chairman Peter Kell the regulator’s investigation confirmed the risk that credit cards can cause financial difficulty.
“There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings,” he said.
“We will be following up to ensure the problems we have identified are addressed, including public updates later this year”.
ASIC’s investigation came off the back of a Senate Inquiry into credit cards which had its own range of concerns.
Looking at the data over the last five years, the corporate regulator concluded that at June 2017 there are:
- More than 14 million open credit card accounts, up 300,000 since July 2012;
- 12.3 million people owned the 21.4 million cards in the dataset.
- Most consumers, 62.1%, had only one credit card, 20% had two cards and 3% had four or more.
- Outstanding balances totalled almost $45 billion;
- Outstanding balances on cards where interest was being charged totalled $31.7 billion – a decline from more than $33 billion in 2012;
- Consumers could have saved approximately $621 million in interest in 2016–17 if their balance was on a card with a 13% interest rate.
Users were charged around $1.5 billion in fees over the previous year, including annual fees, late payment fees and other amounts for credit card use.
ASIC’s report said: “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.”
While consumers in persistent debt or making low repayments “are profitable for credit providers,” the regulator’s report says, “providers have obligations to conduct themselves efficiently, honestly and fairly.”
The report found young people were particularly vulnerable, saying:
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.
Marketing often led customers to choose the wrong card for their needs, the report found.
“Many credit providers have promoted cards with higher interest rates that have additional ‘lifestyle’ benefits such as reward programs and longer interest-free periods,” it said.
“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.”
Balance transfers offers, which entice people to switch cards, are “a debt trap” for up to a third of the people who use them, the report says, a finding that concurs with the the Senate inquiry into the practice.
In the five years of the ASIC review, consumers transferred $12.4 billion in balances, representing 8.3% of all accounts.
While 53.1% of consumers reduced their total debt by 10% or more, with almost 8% paying the debt off completely following a balance transfer, 31.6% of consumers increased their total debt by more than 10% (with 15.7% increasing their debt by 50% or more).
“These findings suggest that the ‘debt trap’ risk for balance transfers noted by the Senate Inquiry exists and affects a substantial proportion of consumers,” ASIC’s report says.
You can read the full report here.