The main area of contention has been the allocation of repayments, particularly in the case of balance transfer offers. In the past, things went awry when consumers used their credit card to make purchases before the older debt was paid off in full. Repayments were then directed towards the lower balance transfer promotional rate, leaving the new debt to accumulate higher interest.
This negated the very reason for a balance transfer and many consumers were caught out with a bigger debt than they had when they started.
Under the new legislation, card providers will now be required to direct payments to the most expensive part of a customer’s credit card debt first – making it easier to reduce debt faster. The trap is that this change only affects new cards issued after 1 July. If someone already has a credit card and is struggling to pay it off, they may not benefit from the government’s reforms.
We suggest consumers keep a close eye on their credit card statements and contact their bank to find out more information. Some banks, building societies and credit unions have already put in place processes that direct repayments to the higher interest debts first and they are doing this on all current credit cards. Others may decide to bypass existing customers and apply the regulation only to new cards.
Every lender will differ so it’s in the consumer’s own interest to find out how this affects them. In some instances they may even be forced to close their credit card account and open another one in order to take control of their debt.
[breakoutbox][breakoutbox_title]See how you rate[/breakoutbox_title][breakoutbox_excerpt] CANSTAR’s credit card star ratings report and results are available for consumers.[/breakoutbox_excerpt][breakoutbox_content] CANSTAR’s credit card star ratings report and results are available for consumers on www.canstar.com.au. This is a comparison of 185 credit cards offered by 65 institutions. Each credit card has been filtered through four common user profiles to determine the card’s suitability for each user type.[/breakoutbox_content][/breakoutbox]
Reining in the debt levels
The NCCP Act targets key areas of credit card operations that are seen as unnecessarily hindering the ability of consumers to keep their credit card debt under control. The reforms that came into effect on 1 July also include:
- banning unsolicited credit limit increase offers unless the card holder agrees first
- limiting how much a credit card account can exceed the credit limit (applying to new cards from 1 July)
- fees for going over the limit will be banned (applying to new cards from 1 July)
- the requirement for monthly statements to include information on how long it will take you to pay off the debt if only minimum repayments are made
- credit card providers to clearly show how their interest-free periods work.
In addition, new cardholders will be notified if they exceed credit limits so they can decide whether to keep using the card or whether to make a payment to reduce the balance.
