How The 2012 Credit Card Reforms Changed Credit Card Lending

Co-author: James Hurwood
The Federal Government’s National Consumer Credit Protection (NCCP) Act has been in force since July 2012. Here’s what it changed for credit card holders.

Reforms put into place as of 1 July 2012 centered largely on tackling key issues of contention within the credit card area, and giving consumers the ability to switch transaction accounts from bank to bank in a more streamlined, less stressful fashion.

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What problem did the 2012 reforms address?

Let’s focus on credit cards. The main problem area in past years has been the allocation of payments, particularly in the case of balance transfer offers.

In the past, things often went awry when consumers used the 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 when they started.

However, the reforms apply to “new” and “existing” credit card accounts, so the trick for consumers is to avoid getting caught in the middle by being clear on the application of the reforms.

The 2012 reforms for credit card holders

If you are not sure, your bank will always clarify things for you but in a nutshell, the credit card reforms are as follows:

New credit card applicants:

  1. “Key facts sheets” with a standardised layout of important information to be provided.
  2. More control over your credit limit, including the ability to nominate your own limit during the application process.
  3. No fees for exceeding your credit limit unless you agree to them in advance with your lender.
  4. Notification whenever you exceed your credit limit in order to assess whether you want to keep using the card or make a payment.
  5. Your repayments will automatically go towards the highest-interest components of your credit card debt, helping you to reduce your debt in a more timely manner.

This last point about repayments going towards the debt that is paying the highest rate is especially important for those who use balance transfers between credit cards to take advantage of low introductory rates. Consumers should be aware that while their balance transfer portion remains at a low introductory rate, they will not be paying off this debt.

In order to prevent making debt problems worse, consumers should be sure to completely pay off all debt on their credit card within the low introductory rate period.

However, these reforms do not affect existing credit card contracts – only new ones. The reforms applicable to new and existing credit card contracts are as follows…

All credit card holders:

  1. No more offers to have your credit limit automatically increased unless you explicitly agree to receive them.
  2. Your monthly billing statement to include additional useful information, like how long it would take you to pay off your entire balance if you only make the monthly minimum repayment.
  3. A clearer picture from card providers about how their interest-free periods work.

Together, these reforms are intended to enable credit card users to make more informed, responsible decisions. At the end of the day, however, it will still be up to you to monitor your statements to ensure your credit card is functioning in the way that works best for you.

Will the reforms work?

Believe it or not, there are many consumers who really do not understand how their credit card works, so any effort to minimise debt-related risks should always be applauded.

The concern about regulation is that financial institutions will find a way around it. For instance, suddenly cutting out a chunk of a card provider’s revenue may lead to less competitive cards being offered.

Some potential unintended consequences of the reforms may well include:

  • Balance transfer 0% offers may become a thing of the past if they prove to be unsustainable under the laws.
  • Institutions may give higher initial credit limits if they know they can’t send out unsolicited increase offers to up the limit gradually.
  • Even more consumers may apply for multiple cards if it is perceived to be hard to obtain a credit limit increase.

However, it’s likely that credit card debt will continue to be a problem until our “pay it later” mentality is erased. Increasing minimum repayments may help but, in the end, the onus is on consumers to change their habits and this may be easier said than done.

It’s 2017 – so have the reforms worked?

Since the reforms were implemented nearly 5 years ago, several lenders and institutions have faced action being taken against them under the NCCP.

At the time of writing, in February 2017 alone, ASIC has warned and taken action against a number of large institutions:

  • Launched a suit against Westpac in the Federal Court for breaching responsible lending laws regarding the selling of mortgages.
  • Announced plans to ban flex commissions in car finance.
  • Fined Fast Access Finance $730,000 for breaches of consumer credit law and engaging in credit activities without holding an Australian credit licence.
  • Fined Cash Converters $1.34 million for their breaching of responsible lending obligations regarding small amount credit contracts last November. ASIC is also considering taking further action against Cash Converters.

While it’s good to see ASIC using the NCCP Act to take action against lenders breaching their obligations, the fact that they’re still having to take action may point to the 2012 reforms being less effective than hoped.

Read our report on payday lenders taken action on by ASIC in 2016 here.

Government considering changes to NCCP

Following the findings of an independent review last year, the government announced they are planning to make significant changes to certain parts of the NCCP Act. This should strengthen the consumer protections in Australian law.

The changes will, among other things, make the cap on total small amount credit contract (SACC) repayments smaller, and ban SACC providers from making unsolicited SACC offers to current or previous consumers. SACC loans refer to payday loans (including payday lenders under notice from ASIC) and consumer leasing (rent-to-buy) schemes.

However, these changes will only be in relation to SACC laws, meaning that consumers may still be under-protected when it comes to other forms of lending such as credit cards.

As mentioned previously, it doesn’t matter how many protections for consumers are introduced if we as consumers don’t practice financial prudence.

The onus is on us to do our research and make sure that any loan or credit product we’re looking at is right for our financial situation before taking it out.

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