Did you know that one in six consumers are having a hard time with credit card debt, which eventually might never get paid.
According to a report conducted by the Australian Securities and Investments Commission (ASIC), data indicated that 18.5% of consumers were just buried by their credit card debt load with outstanding balances pegged at $45 billion.
The study said banks and credit card companies were in the midst of a revenue bonanza with interest being reaped on $31.7 billion of that $45 billion debt figure.
ASIC cautioned that appealing credit card offers were nothing but “a debt trap”, with 550,000 people in arrears and 930,000 with stubborn debt as of June 2017.
A study of 21.4 million credit card accounts that were opened in the last half decade to June last year projected consumers could have potentially saved $621 million in a year if they had transferred to a more suitable credit card with fewer frills and a lower interest rate.
This information came as financial institutions battle daily heat from the banking royal commission, which has discovered unethical and even unlawful practices.
To battle the rising debt mountain that is profitable for banks but unequivocally bad for customers, ASIC recommended tougher regulations to guarantee consumers were only given credit limits that could be repaid in three years.
ASIC deputy chairman Peter Kell remarked that despite regulations that were introduced way back in 2012, not all credit providers had taken steps to counter persistent and revolving debt.
Kell named four lenders, which are Citi, Latitude, American Express and Macquarie, for retaining old rules for credit cards opened before June 2012, with more than half a million customers paying more interest than they absolutely had to.
“There are a number of failures by lenders to act in the best interests of consumers,” Kell said.
“We expect them to respond swiftly to our findings and we will be following up to ensure the problems we have identified are addressed.”
ASIC stated that while the four credit card providers named were not necesarilly breaking the law, they were over-charging clients and, “their conduct is out of step with the rest of the industry.”
In response to a new Banking Code of Conduct, Citi and Macquarie would abolish the ancient methodology from next year. American Express was also set to amend its policy and Latitude was evaluating its position.
The research also said credit card debt by young Australians was “of particular concern”.
“Young people were more likely to be in delinquency and multiple cards were over-represented,” the ASIC study cautioned.
The ASIC paper pointed to the findings of a Senate inquiry about the risks of balance transfer cards, where consumers moved some or all of their credit card balance and pay low or no interest over a period.
“In the Senate inquiry’s view, these transfers can be present a debt trap for consumers … if they fail to pay off the balance in the promotional period, keep the card the balance was transferred from … or make new purchases on one or more of the cards,” said the research.
ASIC relayed that over 30% of consumers raised their debt by 10% or more after moving a balance to a promotional “balance transfer” card.
It also said the profit drive by banks and credit card firms meant few had put in proactive steps to safeguard the interests of their customers, finding that:
- Nine of the 12 providers did not proactively contact consumers that make payments at or near the minimum amount to repay more of their outstanding balance
- Eight of the 12 providers did not look for signs of potential consumer harm other than training frontline staff to look for signs of financial difficulty
“Consumers who are in persistent debt, or repeatedly making low repayments, are profitable for credit providers,” claimed the research.
“However, providers have obligations to conduct themselves efficiently, honestly and fairly.”
ASIC has published a consultation paper to tauten rules on credit card lending to keep consumers from being tied up to unsuitable credit card contracts.
The proposal, which is expected to be opposed by credit card providers, is slated to be enforced from January 1 next year.
Are you having trouble catching up with debt payments? One of the best ways to give you some breathing room is to simply contact your creditor. Here are some tips on how to communicate with your creditor