Credit Card Reforms

This month’s Wealth Pipeline looks at recent credit card reforms.  

Credit Card Reforms

The recent credit card reforms came into force on the 1st July 2012 and are designed to better protect consumers from upward spiraling credit card debt. Those unsolicited invitations to increase our limit may be a thing of the past thanks to the reforms.  Some of the new arrangements only apply to new credit card contracts but others apply to both new and existing contracts. 

When applying for a new credit card, issuers are now required to give the applicant a fact sheet that sets out key information in a standardised format.  This should make it easier to compare offers from different credit card providers.  In addition to the fact sheet, credit card holders who entered into contracts after 30 June 2012 will benefit from the following consumer protection measures.

• Customers will be asked to nominate their credit card limit.
• Fees charged on spending that exceeds the credit card limit (over-limit fees) are banned unless otherwise agreed to.  We still suggest that you continue to check the fine print carefully and ask the issuer directly if over-limit fees apply.
• If a credit card holder exceeds their card limit, the card provider must notify the card holder within two business days, thereby providing the card holder an opportunity to stop spending or make a repayment.
• Credit card providers are required to direct payments to the most expensive part of your credit card debt first.  Many credit card contracts have different interest rates including one for standard purchases, another for cash advances and in some cases, an introductory rate that applies to transfers from other credit cards.  Having payments directed to the most expensive items first will assist in making it easier to reduce debt.

While the foregoing conditions apply to new credit card contracts, there are some changes that will apply equally to existing credit card customers.

If you received a credit card statement after 30 June 2012, you may have noticed some changes.  All credit card statements are now required to include a “minimum repayment warning”.  This warning contains personalised information and states how long it will take to pay off your credit card if only making the minimum monthly payment and not adding any further charges.

In addition to the minimum payment warning, credit card providers will no longer be able to make offers to increase your credit card limit unless you agree and providers must also clearly show how their interest free period works. 

A Worked Example

A credit card balance of $4,000, attracting an interest rate of 18%, will take three years and 11 months to repay based on a monthly repayment of $120.  Total interest will amount to $1,586.  If the monthly repayment is increased to $200, the repayment period is slashed to two years and the interest paid is also halved.