‘Debt trap’: Australia’s $45b problem

According to ASIC’s newly-released review into credit card lending, around 1.9 per cent of Australian consumers are struggling with credit card debt, with a whopping $45 billion owed nationwide.

Meanwhile, interest is being charged on $31.7 billion of that debt, and as of June 2017 there were almost 550,000 people in arrears, an extra 930,000 with persistent debt and a further 435,000 people repeatedly repaying small amounts.

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ASIC deputy chair Peter Kell said “only a handful” of credit providers were taking proactive steps to address persistent debt, low repayments or poorly suited products.

“There are a number of failures by lenders to act in the interests of consumers and we expect them to respond swiftly to our findings,” Mr Kell said.

“We will be following up to ensure the problems we have identified are addressed, including public updates later this year.”

ASIC’s investigation also found many Australians were being given credit cards that didn’t actually meet their needs, such as carrying balances over time on high interest rate products, when lower-rate products would save them money.

In fact, ASIC predicts that these consumers could have saved around $621 million in interest in 2016-17 if they had only carried their balance on a card with a lower interest rate.

The report stated that while credit cards offer flexibility, they can also become a “debt trap” for many.

ASIC also found while many Aussies slashed their debt during the promotional period of a balance transfer onto a new card, more than 30 per cent actually increased their debt by 10 per cent or more.

And while new rules which came into effect back in 2012 require lenders to apply repayments against amounts accruing the highest interest first, Citi, Latitude, American Express and Macquarie have all hung on to the old rules for credit cards which were opened before the regulations were introduced.

Around 525,000 people have been paying more interest as a result — although Citi, Macquarie and American Express have all indicated they will adopt the new rules from 2019.

As of June 2017, ASIC found there were 14 million active credit card accounts, an increase of over 300,000 since 2012.

These are the cards with the lowest rates, according to RateCity.

These are the cards with the lowest rates, according to RateCity.Source:Supplied

Consumers were charged around $1.5 billion in fees in 2016-17, including annual fees, late payment fees and other amounts for credit card use.

ASIC is pushing for tighter regulation which would ensure customers were only approved for credit card limits which could be repaid within three years — a stance welcomed by consumer advocate RateCity.

RateCity spokeswoman Sally Tindall said reforms should include mandatory minimum repayments of at least 5 per cent, a low rate credit card option from every lender, greater education around the pitfalls of balance transfers, including the loss of interest free days and the impact of not paying off your balance within the interest free period, and the benefit of closing your old card when you transfer.

“People need to be forced to pay down their debt and minimum repayments are an essential part of this,” Ms Tindall said.

“RateCity data shows that 54 per cent of lenders ask customers to pay just 2 per cent of their credit card debt every month, while the highest minimum repayment is just 5 per cent, offered by three providers.

“That’s simply not enough. We would like to see the majority of lenders increase their minimum repayments to 10 per cent, with a government-mandated minimum of 5 per cent.

“Our banks can do better than this.”

alexis.carey@news.com.au

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