New rules for credit cards: what do they mean for you?
The name John Biggins may not sound familiar, but the banking industry has much to thank him for. Mr Biggins, a Brooklyn banker, was the brains behind the very first credit card in 1946. Known as the Charg-It card, it led to Diners Club membership cards and store cards, revolutionising the way everyday people shopped.
Australia began with store cards, Diners Club and American Express, but in 1974 when the Bankcard was launched, we really jumped on board.
Today we have almost 16 million credit cards in circulation, a fact that has caused successive governments to regulate, and further-regulate, their use.
The latest regulatory changes came in July 2018 when the federal government banned credit card providers from inviting customers to increase card credit limits. Designed to protect card users, additional rules came into force on 1 January 2019.
Here’s a round-up of the main ones:
- Applications for new credit cards or credit limit increases must be assessed on the applicant’s ability to repay the entire credit limit within three years.
- Customers can request to cancel accounts or reduce credit limits online. If the request is made by phone or otherwise, providers must assist without question.
- Card providers are banned from retroactively applying interest charges on card balances where the full statement balance is not paid.
These reforms are likely to result in reduced card limits, potentially impacting those applying for a balance transfer, but more about this later.
According to the Reserve Bank of Australia (RBA), in November 2018, Australians made 250 million card transactions totalling $29 million – up by 10 million transactions over the previous 12 months.
This is possibly due to increasingly popular tap-and-go technology. We’re ‘tapping’ everything from lattes to doctor appointments, often losing track of purchases along the way.
When using credit cards for quick personal loans beware the fine print! Card loans may offer reduced interest rates, but missed payments can result in interest rates reverting to the card’s higher rate.
Credit card balances can quickly blow out and take years to pay off.
Let’s do some maths.
- Card balance: $5,000
- Interest rate: 18%
- No fees or further purchases
By paying the minimum monthly amount ($102 then decreasing), it would take 33 years to pay off at a total cost of $17,181 (including $12,181 interest)!
You’re right in thinking that’s an extreme – you wouldn’t take 33 years to pay off $5,000 but we wanted to highlight how interest can get out of hand.
If you’re already in card trouble:
- Consider making an additional payment of say $50 per month.
- Balance transfers work well provided you meet your payment obligations during the low/interest free period. Note that new credit limit regulations may reduce the amount you can transfer to a new card.
- By consolidating multiple credit cards into a personal loan or mortgage, the interest rate will be lower and you’ll only have one payment per month. This may cost more in the long run so consider professional help to do the sums.
Maintain control by:
- Checking statement transactions for accuracy.
- Being aware of your credit rating. You’ll find a list of credit score agencies on gov.au.
- Using only one buy-now-pay-later plan at a time, and using the app’s tracker to monitor spending.
- Keeping tap-and-go receipts.
- Seeking advice from your financial adviser about budgeting for your financial position.
From humble beginnings, the credit card became the world’s most widely-accepted form of currency – some countries no longer use cash at all!
We Australians are becoming increasingly cashless, but while enjoying the advantages of plastic, remember to always manage your cards wisely and maximise their benefits – not their credit limits.