Last week the British Prime Minister, Gordon Brown, announced new measures to prevent credit card companies from using some of the “sharp practices” that cause consumers to get into debt and pay exorbitant interest. The key changes
will be introduced by the industry this year and given statutory force as soon as possible, according to the government’s Department for Business, Innovation and Skills. However, most of the practices to be outlawed in the UK are standard practice for Australian financial institutions. The key UK changes include:
• Repayments will be allocated to the part of the debt attracting the highest interest
• Bans on unsolicited credit limit increases
• Consumers can reject interest rate hikes
• More information on the dangers of only making minimum monthly repayments
• Better disclosure of fees and charges.
A comparison: UK versus Australia
The table below describes the UK changes, and our analysis shows the contrast with what happens in Australia — unfair tactics by our banks and card providers.
Australian standard practice
The right to repay: when a consumer makes a credit card repayment, it will be allocated to the amount of the debt with the highest interest rate. This is called a positive allocation of credit card repayments.
In some cases, when a consumer makes a repayment, it’s applied to the portion of the debt that attracts the lowest interest rate (for example, 0% on a balance transfer from another card). Meanwhile, the cardholder might be accruing interest at 20% on another part of their debt, but that debt isn't reduced. Here an example: the customer transfers $1000 to a 0% balance transfer card and then uses the card to spend $100 on groceries. The customer makes a $100 repayment, which reduces the interest-free balance to $900, while 20% interest is charged on the groceries.
Restrictions on card companies sending unsolicited credit limit increases to consumers, including a ban on unsolicited increases to people experiencing financial difficulties.
A 2008 report commissioned by the Consumer Action Law Centre revealed the irresponsible marketing and psychological tricks used by banks to increase consumers credit limits. These unsolicited offers often lead to bigger debt problems.
Consumers will have the ability to reject interest rate and credit limit increases. For example, when interest rates increase, consumers will have up to 60 days to reject the rate change, close the credit card account, and pay down any remaining balance at the previous (lower) rate.
Credit card companies must disclose rate changes to consumers, who of course can stop using their cards for new transactions. But if the customer still owes money on the card, Australian contracts do not state that the customer can repay this debt at interest rates that applied before the increase.
Information on monthly minimum repayments (MMR): companies will be forced to make clear that only paying the MMR is the most expensive way to pay off a credit card. For new customers, in the future the MMR specified must always cover at least the fees, interest and 1% of the outstanding card balance, so cardholders can start to make some headway on their debt.
In Australia the minimum required monthly repayment required by credit card companies is as low as 2% of the balance owing. By only making the MMR, it could take decades to pay off a credit card. In fact, only making this minimum repayment often means your debt gets bigger, not smaller. Improvements in this area are currently being considered by the government (see below).
Card companies will send out annual statements detailing all fees and charges, allowing consumers to more easily compare their card with other offers.
In Australia, consumers who want details of all fees and charges need to contact the card company or read product disclosure statements and fee schedules. UK-style disclosure would be an improvement.
New credit laws coming
Treasury in Australia is currently considering credit cards and responsible lending as part of new national consumer credit laws, but according to Katherine Lane, Principal Solicitor with the NSW Consumer Credit Legal Centre, a ban on unsolicited limit increases is not on the Government’s agenda.
“Consumer advocates in Australia have wanted a ban on unsolicited limit increases for many years,” Lane says. “We have all witnessed the huge amount of harm caused to consumers who are lent more money than they can’t afford to repay. Many Australians have credit card debts that they will not be able to repay (even if they never used the credit card again) for many years. CCLC is still seeing offers of unsolicited limit increases. Recently, one provider offered a customer a limit increase to $28,000 over the next 3 years. This appears to have been an attempt to avoid the need to pester people every few months.”
Changes to minimum monthly repayments on credit cards have been proposed, but Lane says it’s unclear what the changes will be. “I’m hoping Australia does better than the UK by ensuring credit card assessments are based on the ability to repay debts over 12-24 months and not decades, as is often the case now. And minimum monthly repayments should only be increased for new cards, so that they are repaid within 24 months.”
Changes worth hundreds of millions of pounds
The UK changes will take an estimated ₤500 million per year ($830 million) from the coffers of credit card companies and into the pockets of consumers. In Australia, the latest Reserve Bank statistics show a total balance of $33.8 billion is accruing interest on Australian credit cards, so the effect of similar changes in Australia would be enormous.
For more information on the UK changes, read the UK Government’s joint commitment with the credit card companies (the link will open a PDF document). For information on card traps and how to avoid them, read our credit card report.