Proposals for tightening responsible lending rules for credit cards

Monday 17 August 2015

Article by Mozo

In a bid to prevent consumers from running the risk of big card balances with high interest charges, the Australian Securities and Investments Commission has raised the possibility to tighten responsible lending rules for credit cards.

• RELATED: What happens if…I have a low credit rating?

This proposal by ASIC has been included in its submission to the Senate Economics References Committee. The committee is inquiring into credit card interest rates and the proposition by ASIC is not the only submission to suggest the idea of tightening responsible lending rules for credit cards.

According to ASIC, it is not high interest rates on cards that lead to hardship. Instead, it is because "some consumers over-borrow and under-pay large amounts of credit card debt (to which the high interest is applied)."

ASIC said: "Some people begin with the intention of always paying off their balance in full and believe they will never pay interest."

The Treasury submission said proposals to clarify and strengthen the obligations on card providers to understand consumers' requirements "merited further consideration".

Treasury said tighter responsible lending rules "may reduce the likelihood of consumers receiving credit cards and credit limits that are inappropriate to their financial requirements."

It is also suggested that credit card providers be required to conduct serviceability assessments depending on repayments required to pay off debt within a reasonable timeline.

Another submission, by Bank Australia, was more emphatic, stating that the inquiry should recommend better use of responsible lending practices. In addition, is also mentioned that credit card accounts going into arrears consistently should be reviewed.

Consumer Action Law Centre in turn proposed that credit assessments for credit cards should be based on whether the consumer could afford to repay the full credit limit within three years. It also added that minimum monthly repayments should be raised.

This discussion over credit cards has come up after interest margins on cards increased sharply during the financial crisis and have increased further in the post-crisis period.

For consumers who are looking to compare credit cards to decide what type of card is best for them, Mozo’s money experts talk about the different features to prioritise and the fees to watch out for in these handy credit card guides.