Are you a victim of credit card debt trap?

Ross Greenwood speaks to ASIC’s Deputy Chair Peter Kell after a major review  ASIC has found 14 million Australians have a credit card debt, and one in six are struggling to pay it off.

Introduction: Are you a victim of credit card debt trap?

Ross Greenwood: Very shortly we’ll hear from the Deputy Chairman of the Australian Securities and Investments Commission, Australia’s corporate cop that is Peter Kell. That is in regards to this new report that ASIC has pulled out today showing that as many as one in six, almost one in five credit card users in Australia are in financial stress and really are struggling to repay back the balance of their card lines. As a result of this report which has been a study of 21 credit card companies over the past five years, there are going to be significant changes in laws which in the future from January one next year are likely to mean that a lender via a credit card to you, needs to be able to prove to itself that you can repay that loan within three years, otherwise, no credit card for you.

It’s going to interesting to see how the banks and others react to all of this.

Peter, this report shows, if you like, the empirical evidence that banks are getting away with what I would call a road effectively to lock people in the credit contracts so that they can virtually never escape.

Interview with: Peter Kell, ASIC, Deputy Chair

Peter Kell: We found quite a concerning level of people who are really struggling to pay back their credit card debt, more than 99%. In fact almost one in five people are struggling in some way with either getting behind on their payments, or only paying back the real minimum, or carrying very large amounts of debt going forward. To have almost one in five people being in that position clearly signals that we have a problem with credit card debt.

Ross Greenwood: Okay. You call it a debt trap in this report yourself. Just explain the trap.

Peter Kell: The trap is that when we take out a credit card, we all think we are going to be paying off the full amount every month. What happens all the time is that as we run up those debts and it’s very easy to do so, it’s very easy to use credit cards, we get up closer and closer to that limit, it becomes harder to being it back under control, we take out a second card in some cases or we end up rolling over that credit every month. That’s not a way to manage your debt and, ultimately, it’s not how credit cards should be used.

Ross Greenwood: If a bank or a lender with credit cards is charging 18% to 21% interest, why is there incentive that [unintelligible 00:02:46] that person pay it off?

Peter Kell: Well, it’s certainly the case that some of the marketing approaches by the banks and other lenders, some of the ways of calculated interest, the balance transfer offers have actually not encouraged responsible use of credit cards, but rather have encouraged the view that those things are easy to use and they are easy to control for all of us. For some people they are, but for many people that’s not the case.

Ross Greenwood: Haven’t we heard through the Royal Commission over these past few weeks issues, on-going issues about banks and problems of responsible lending? Surely, there is a responsibility on a credit card issuer to make certain a person can repay that debt within a reasonable period of time.

Peter Kell: That’s right. We certainly agree with that and that’s going to be a new law that comes into place from the beginning of next year. Banks will have to undertake a tougher assessment of whether the customer can pay back the credit under a credit card within a reasonable time frame. We are proposing three years, and there are some other new laws coming in as well which we think will help to reduce the risk of people getting into real problems.

For example, unsolicited offers to increase the limit on your credit card, that is one that will be banned going forward. They can often hit people at a weak moment when they are a bit financially vulnerable, you put your limit up by another few thousand dollars and you run right up against that new limit. That is a problematic practice that has to stop.

Ross Greenwood: Okay, but then there is the other aspect of this and that is if you have that three year time limit on which a person’s got to be able to reasonably pay back that debt that will increase the repayments but consumers will have to put out. Meaning people right there who are way behind with their credit cards are not going to be having the capacity to repay those loans back within three years.

Peter Kell: You will still be able to pay back a smaller amount if that suits you for at a particular point in time, but what it does mean is that the risk of, say, a student ending up with a credit card which has a $25,000 limit is going to be very substantially ruled out because those are the sorts of situations that we hear about where people almost have to argue to get there credit limit brought down and that doesn’t ultimately encourage responsible use of credit cards.

Ross Greenwood: Do you believe that banks in hind sight and what you found here have been responsible in the way in which they have run, the way in which they have administered their credit risks inside their credit card businesses?

Peter Kell: We have found that the majority of the major players in the credit card market have not been active in identifying those customers that are at risk and those–

Ross Greenwood: Hang on. Not been active on identifying those people with credit card risks, in other words, they have let people basically rack up debts. This is not responsible, surely.

Peter Kell: That’s our message that we now want to see banks and other lenders taking proactive steps to identify consumers who are clearly having difficulty in managing their debt, who are right up at the limit the whole time, who are only ever paying off the absolute minimum and getting there and help those people to manage their debt more effectively. We will be publishing [unintelligible 00:06:20] publicly on those banks that do that and those banks that don’t.

Ross Greenwood: And if they don’t do that?

Peter Kell: If they don’t do that, we’ll be stepping in to assess whether they are engaging in responsible lending, whether there are other actions that need to be taken because as a community we don’t want to see so many people experiencing real difficulties with their credit cards.

Ross Greenwood: There were new rules that were entered into in 2012 that required lenders to apply repayments against demands accruing the highest interest first. In other words, that when a person that’s paying cash, the debt with the highest interest will be repaid first. There were four lenders, City Group, Latitude, American Express and Macquarie returned old rules that didn’t do that. Now, surely again this is where you raise questions about even the ethics or the responsibility of the people issuing those cards.

Peter Kell: That’s right. Those rules that you talk about have seen a reduction in the interest payments that people have made but they weren’t retrospective. What we are saying is banks, if they are being responsible, should have applied those rules retrospectively. Most did, but some did not as you have just pointed out. We are calling them out. Thankfully some of them are now going to make that change, but it’s another example of where too many players in this market have not been acting in the interest of their customers.

Ross Greenwood: The three-year rule that you are bringing in where a person has to be capable of repaying a credit card debt within three years, is that going to be a retrospective action or is that going to be something for new cards issued from the point in time in which it is introduced?

Peter Kell: That’s for new cards so it won’t apply to past cards, but we will be obviously looking at how banks apply that issue of responsible lending across their entire portfolio. As we said, we think the banks themselves should be taking more active steps to deal with those customers that are clearly experiencing difficulties. That’s something that we are going to be publicly working on with the major players in this sector in the near future.

Ross Greenwood: You and I can both understand it’s a great business lending money to people at 18 to 21%, why would you be encouraged to try and change that if you are a bank or a lender?

Peter Kell: It certainly is, ASIC’s estimated that if we could manage to shift most of the people on the higher interest rate cards to a lower interest rate card, we’d save about $620M a year in interest payments. What we want to see as well is provision of credit cards in a way that allows people to use them effectively and efficiently that are quite convenient for many people rather than a focus on the bells and whistles and what color they are, when that actually hides quite expensive rates.

Ross Greenwood: The bank, if you gather the industry and, say, “We are going to try and encourage your customers to move and it’s going to cost you $620M a year in revenue,” as a business person I would go, “Forget, I’m not really going to try and encourage my customers to do that.”

Peter Kell: That’s why we have got some of these new laws. The responsible lending laws, the ban on unsolicited credit limit offers. We are also going to be implementing the new law that makes it much easier for you to cancel a card because what we found with balance transfers is that 63% of people didn’t cancel the card that they were moving out of. One of the problems there is it often appears to be mysteriously hard to get rid of your old card so even things like that we think can make a difference.

Ross Greenwood: Peter Kell. As always, appreciate your time.

Peter Kell: Thanks very much, Ross.



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