Redressing longstanding consumer detriment
The government has proposed major reforms to Australia's $50 billion credit card market, following a bi-partisan inquiry in August last year. Many of the reforms were included in CHOICE's submission to the inquiry.
The issues we raised in our submission included:
- rising interest rates in the face of a series of official RBA rate cuts
- high interest rates on so-called "low cost" cards
- the difficulty of switching cards
- hidden costs that make it hard to compare cards.
Under the currently proposed reforms, banks would be required, among other things, to prominently display interest rates and fees and allow consumers to cancel cards without having to visit a branch.
What the government has proposed
- Credit limits should be deemed unsuitable if the borrower can't afford to pay within a reasonable time.
- Unasked-for credit limit increases should be prohibited.
- A standard approach should be established for the application of interest to unpaid balances at the end of an interest-free period.
- Credit card customers should be able to easily reduce credit limits or cancel a card online rather than having to deal with bank staff charged with keeping their business.
- Annual credit card costs should be clearly disclosed instead of buried in the fine print.
- Annual rates and fees should be clearly disclosed in advertising and marketing materials, not deliberately hidden.
- Customers should be provided information about how much they can save with other credit cards from the same issuer, such as genuine low-rate cards.
- Customers should be regularly informed by email, text or other electronic communication about the expiry of special offers and how much credit they've used.
- Credit card issuers should offer customers the option of making higher repayments and proactively contact customers who are making only minimum payments and drawing out their debt.
CHOICE welcomes a consumer win
"For too long, banks have had it all their own way when it comes to credit cards, often hiding the true costs of cards behind flashy marketing and short-term offers," says CHOICE campaigns manager Erin Turner.
"Australians have been confused by '0% interest balance transfer' offers that revert to toxic interest rates at the end. To make matters worse, banks then make consumers jump through unnecessary hoops just to cancel a card."
"As a result of these changes CHOICE expects to see the big banks finally start competing on the real costs of credit cards: interest rates and fees. We hope these reforms will eventually mean fewer consumers are stuck in high-interest, poor-value credit cards," Turner says.
A bad way to borrow
Credit cards have long been a poor choice of credit unless you pay off the balance before the interest kicks in, and there's a reason the banks don't clearly disclose the true costs of their card in their marketing and credit card statements.
As we reported last year, interest rates on ANZ, Commonwealth Bank, NAB and Westpac low-interest credit cards have moved by less than 1% over five years, with most rates increasing from 2013. Over the same period the RBA cash rate dropped by a whopping 2.75%.
And those are just the so-called 'low rate' cards. Standard and rewards credit cards from ANZ, CBA, GE Money, NAB and Westpac still charge exorbitant rates.
A true low-rate card would charge 10% interest or less, a far cry from the average of 18.98% charged by the big four banks.
In line with the spirit of the reforms, CHOICE has called for:
- credit card advertising to provide a simple cost comparison with an 'average monthly cost' figure based on fees and interest payments on an average balance
- credit card statements to include information about how much consumers would personally save if they switched to the provider's cheapest card, including any card offered by a sub-brand
- statements to include information about the lowest interest rate in the market as identified by the RBA.