Chapter 5
Helping Australians avoid the credit card debt trap
5.1
A primary concern of the committee in this inquiry is that too many
Australians are 'revolving' credit card debt for extended periods of time and
getting hit by high interest charges in the process. This chapter explores the
problem of credit card debt, and suggests reforms that might help consumers
better manage their credit card debt or, better still, avoid accruing it in the
first place. The efficacy of existing responsible lending obligations, as they
operate in relation to the credit card market, is also addressed.
5.2
An important reform suggested by a number of witnesses during the
inquiry was mandating higher minimum repayments on credit card debt. This would
better reflect the view that credit cards should ideally be used for
transactions and short-term credit, rather than as a long-term debt facility.
This chapter considers various options for reform in this regard.
5.3
Consideration is also given to whether the current prevalence of low or zero interest
balance transfer offers in the credit card market, as currently structured and
marketed, are hindering the capacity of consumers to manage and repay their
credit card debt.
5.4
It is clear that some individuals end up in credit card debt because of
poor decisions in choosing a card, using that card, and managing their card
debt. Though individuals are expected to assume personal responsibility for the
financial decisions they make, evidence received in this inquiry indicates that
the credit card market is structured in such a way as to make it extremely
difficult for individuals to make informed decisions about credit card
debt. This chapter considers whether the credit card market is, in this
respect, failing Australian consumers, and steps that could be taken to help
consumers better understand the risks inherent in credit cards. Specifically,
the chapter looks at existing financial literacy programs and tools, and weighs
options for expanding or improving current offerings in this regard.
5.5
Finally, this chapter assesses the adequacy of existing supports for
people experiencing financial hardship due to credit card debt.
Long-term credit card debt and responsible lending obligations
5.6
Ideally, cardholders would be able to pay their balance in full at the
end of each statement period and thereby avoid interest charges. However, as
ASIC rightly observed, the ability to pay less than the full balance each month
(and even to make a very low minimum repayment in a particular month) provides
important flexibility to consumers. This can be especially useful when a
consumer incurs large expenses in a particular month, and decides to pay less
than the full balance on their card in order to free up cash for other
expenses.[1]
5.7
However, a problem arises when a cardholder consistently fails to pay
their outstanding balance at the end of statement periods, and ends up using
their credit card as a borrowing facility, rather than to manage cash. In such
instances, cardholders risk taking on significant levels of ongoing debt with
little prospect of repaying it in the short to medium term. Given the high
rates of interest often charged on credit card debt, they are unsuited as
long-term debt facilities, particularly given more affordable products are
often available.[2]
5.8
SocietyOne explained to the committee that the problem was not credit
cards per se, but rather the use of credit cards as a long-term debt product:
We think that they are in fact convenient and very useful
short-term financing tools and, candidly, are probably one of the most widely
used financial products anywhere in the world. The problem, as we see it, is
when credit cards are used by consumers to provide something other than very
short term financing—that is, medium or even multiyear funding. It is in that scenario
that credit cards become some of the most, if not—apart from perhaps payday
lending—the most expensive credit choice that is available to Australian
consumers for unsecured financing purposes.[3]
5.9
As already discussed in chapter three, consumers often pay little notice
to credit card interest rates when comparing the market. Card providers both
reflect and reinforce this consumer inattention, inasmuch as they tend to
market credit cards as payment systems, rather than as borrowing products.[4]
In this sense, while consumers might apply for a credit card on the basis that
it represents good value as a payment system, they often end up with what is,
in effect, a decidedly poor value debt product without having ever given
sufficient consideration to its suitability in this regard.
5.10
Banks acknowledged that credit cards were not an appropriate product for
long-term debt. For example, Westpac told the committee:
A credit card is a flexible line of credit designed to allow
for periods of time where only small amounts of principal are being repaid. For
the majority of our customers this feature is valuable. However, if the minimum
monthly payment is used over the long run, the credit card no longer offers
enough value for the customer.[5]
5.11
Banks also suggested that consumers were already making appropriate,
informed product choices with respect to credit cards and their borrowing needs
more generally. For example, Westpac wrote that there is 'evidence that
consumers are selecting the right product for their medium-term borrowing needs
with Personal Loans growing faster than Credit Cards over the last few years'.[6]
Westpac argued that debit cards were increasingly popular as a payment tool,
and in fact over the past 12 months spending on debit cards had grown
faster than spending on credit cards.[7]
Taken together, Westpac concluded, these trends demonstrated that 'consumers
are being more prudent with Credit Cards and using them more as a payment
mechanism than a borrowing tool'.[8]
As already noted in chapter four, the banks also argued that the increased
take-up of low-rate cards was indicative of a customer base that was informed
and capable of making solid financial decisions in the consumer credit
space.
5.12
As explained further below, some witnesses challenged the banks
contention that only very small numbers of cardholders were struggling to
service their credit card debt, and argued that the incidence of long-term
credit card debt was in fact indicative of a failure of the responsible lending
obligations in relation to the credit card market.
5.13
The National Credit Act, as chapter two explained, sets out responsible
lending obligations that apply to all forms of regulated credit, including
credit cards. ASIC is responsible for administering the Act's responsible
lending obligations, and its primary guidance in this respect is set out in
RG 209. ASIC advised the committee that the responsible lending
obligations are principles based, and it was incumbent on a lender to inquire
into the financial situation of a borrower and ensure a loan was not unsuitable
for that borrower. A loan would be deemed unsuitable 'if the borrower cannot
repay the loan contract in circumstances other than with substantial hardship
or where the loan contract does not meet the requirements and objectives of the
borrower'. When it was put to ASIC that this appeared a rather subjective test,
ASIC responded that it would characterise the test as 'scalable', in that:
...it depends on the situation of the borrower; it depends on
the type of loan contract that you are looking to provide the borrower; it
depends on the information you already have about the borrower. So there are a
range of considerations that inform to what extent the lender has to make
inquiries and conduct verification.[9]
5.14
ASIC further explained that the responsible lending obligations are:
...very much a point-in-time obligation; the obligation applies
when the consumer applies for a credit card, and the lender has to make an
assessment at that time as to whether the credit contract is not unsuitable.
Once the consumer has the credit card they may well use the credit card in a
way that they did not initially expect to use the credit card, so they might
end up in a lot more debt than they expected, or their circumstances might
change. The responsible lending obligations do not address anything that
happens once the credit is provided.[10]
5.15
Banks insisted that in issuing credit cards and setting credit limits
they took the responsible lending obligations very seriously. Westpac reported
that it approves less than 60 per cent of applications it receives
for new credit, and less than 15 per cent of accounts are eligible
for a credit limit increase at any point in time.[11]
ANZ advised the committee that it 'filters and rejects on average
35 per cent of potential applicants and, where consumers apply for an
unsuitable card, looks to suggest a more appropriate card option'.[12]
5.16
Westpac observed that since the introduction of the responsible lending
obligations in the Consumer Credit Act and the subsequent additional reforms
regarding credit card lending, key indicators of consumer behaviour showed
positive trends. For instance, revolve rates had declined, and average monthly
repayments had increased. On this basis, Westpac submitted that there was no
need 'for any new regulatory changes to the operation of the consumer credit
protection regime'.[13]
5.17
ANZ also argued that recent reforms, including the 2011 requirements
regarding minimum repayment warnings, had been 'successful in reducing balances
paying interest', and it expected this trend would continue over time.[14]
ANZ further advised that in addition to meeting its responsible lending
obligations, it also works with customers to review their needs and goals,
including finding the most appropriate credit card for their circumstances and
needs.[15]
5.18
Similarly, the ABA submitted that there are already strong protections
in place for credit card customers. In addition to the existing responsible
lending obligations, 'most members of the
ABA have signed on to meet further voluntary obligations under the Code of
Banking Practice when dealing with individual and small business customers'.[16]
5.19
While card providers insisted they applied stringent criteria in issuing
credit cards, the committee received some evidence suggesting that consumers
were still being issued with cards with excessively high credit limits. Mr Les
Banton told the committee of his struggles with credit card debt and advised
that he had previously been jailed for fraud against the banks and declared
bankrupt. He suggested that if he applied for an unsecured personal loan:
...they would probably knock me back on 13 per cent. With my
history and the fact that I am on [the Disability Support Pension]...they would
knock me back. Yet they would give me a credit card of 20 per cent.[17]
5.20
The Consumer Action Law Centre and the Financial Rights Legal Centre
also expressed concern that people were still being given credit limits that
they were unlikely to be able to service. This, they submitted, suggested a
failure in the operation of the responsible lending obligations as they applied
to credit card lending. In particular, they argued that to the extent credit
card providers were assessing the suitability of applicants based on their
ability to service the minimum repayment, this was inconsistent with the
intention of responsible lending laws and the guidance in RG 209:
In RG 209 it states that for credit cards, there may be some
risks associated with assessing a consumer as having the capacity to repay the
contract based solely on being able to meet the minimum monthly repayments.
According to ASIC, if by paying only the minimum monthly repayments the
consumer is likely to take a long period of time to repay the maximum limit on
the card, the credit provider should also consider whether this would meet the
consumer's requirements and objectives (i.e. taking a number of years to repay
a relatively small debt, and paying high amounts of interest on this debt).
While this is positive guidance, it is not a 'black and
white' rule and thus has limited impact on credit card provider's behaviour.
Currently, many credit card providers are effectively assuming that consumers
will carry long term debt by making minimum monthly repayments in assessing the
suitability of a credit contract. To reduce the likelihood that consumers will
continue to pay interest over a long period of time, we recommend that credit
card providers be required to assess whether a consumer can afford to repay the
entire credit limit within three years.[18]
5.21
Ms Kat Lane from the Financial Rights Legal Centre stated that it was
absurd that credit card debt and repayment terms were structured in such a way
that it could potentially take decades to clear a debt. Yet, as she noted, the
idea that a small credit card debt might be repaid over decades was now
considered normal:
My point here is: it is long-term debt and it should not be,
and we need to structurally reform that. A line of credit should not be
long-term debt. The banks have managed to put that in and we all accept it as
long-term debt—they have pulled a swiftie. We need to fix that. They have well
and truly Jedi mind-tricked us into thinking that credit card debt should be
long term when it should not.[19]
5.22
Ms Lane concluded by suggesting that it was imperative people only be
given credit card limits that they could afford to repay in a reasonable period
of time. Ms Lane reiterated the Financial Rights Legal Centre's position,
set out in a joint submission with the Consumer Action Law Centre, that three
years would constitute a reasonable period in this regard.[20]
5.23
Ms Denise Boyd, the Consumer Action Law Centre's Director of Policy and
Campaigns, suggested that in implementing this reform it was necessary to be
mindful of the risk that preventing certain people from accessing credit cards
could push them 'towards even more unaffordable forms of credit'.[21]
It was therefore necessary, Ms Boyd stressed, to tackle both the issue of
credit cards and other forms of lending together:
There are some issues there—we appreciate that—but the worst
thing you can do is go and take out an expensive line of credit, whether that
is a credit card that you cannot afford to pay the debt on or a payday loan.[22]
5.24
Treasury also suggested, as one option for policy reform, exploring how
the responsible lending obligations were operating in the credit card market,
with particular reference to:
...the assessments required of the consumer's capacity to make
repayments and of their requirements and objectives. Ensuring credit card
providers assess serviceability based on repayments required to pay off debt
within a reasonable period could reduce the incidence of credit card distress.[23]
Committee view
5.25
The committee found the evidence received during this inquiry about
people struggling with long-term credit card debt deeply concerning. This
evidence, which was provided by, among others, consumer groups, financial
counsellors, community support groups, and individuals, clearly suggests that
too many Australians are struggling under the weight of high-interest bearing
credit card debt that they have no prospect of repaying in the short-to-medium
term. As such, the committee does not agree with the banks that there is no
need to review or refine the responsible lending obligations as they are
currently operating in relation to credit card lending. In particular, the
committee believes card providers should be explicitly required to evaluate
credit based on a consumer's ability to repay their credit limit over a
reasonable period, rather than on their ability to meet minimum repayments.
While some witnesses have submitted that a 'reasonable period' in this regard
would be three years, the committee considers that the exact period should be
determined by government in consultation with industry, consumer groups and
other interested stakeholders.
Recommendation 6
5.26
The committee recommends that the responsible lending obligations, as
they apply to credit card lending, be amended so that serviceability is
assessed on the basis of the borrower's ability to pay off their debt over a
reasonable period. The government should consult with industry, consumer groups
and other interested stakeholders to determine what constitutes a 'reasonable
period' in this regard.
Minimum repayments and amortisation periods
5.27
In discussing the problem of long-term credit card debt, many witnesses
noted very long amortisation periods are only possible because minimum
repayment levels are set so low. While card providers are currently able to set
their own minimum repayment levels, as the ABA explained these are typically
set at about 2 per cent per month, with a minimum flat repayment between $10
and $25.[24]
5.28
Ms Turner from CHOICE criticised the fact there is no standardised form
for monthly repayments:
For a consumer with an average balance, if they are with, I
think it is, ANZ, their minimum monthly repayment means they will be paying off
an average debt for a little over 17 years. Because Westpac sets it
differently, for the same amount of debt you will be paying it for over 26
years.
That is the difference between two per cent or $25, whatever
is greater, and two per cent or $10, whatever is greater. That small change
adds a decade of debt. Adding some sort of standardisation would really assist
consumers.[25]
5.29
CANSTAR advised the committee it had previously rated low minimum
payments as a positive feature of credit cards because this provided added
flexibility to the cardholder. However, its position had changed, and its
method for rating cards had evolved with it:
Some years back our credit card methodology in rating viewed
the world as 'the greater the flexibility of the product in the hands of the
consumer the better it is as a product'. I think that is a sound first
principle. This meant we rewarded lower minimum repayments. We looked at the
methodology a few years back and said, 'Now this is getting a bit silly.' They
are reducing the minimum repayment down to 2.5 per cent, and we said that that
was really wrong, because consumers will never repay the debt. So we bumped it
up and said that any card that is not actually at least covering interest
charges on the minimum repayment is not a good card for a consumer, because
they will never by repaid, by definition.
Would a minimum repayment solve a problem? It could induce a
level of awareness for the consumer because it is a trigger—it is one of those
market triggers. Because being on the wrong card and paying a very high rate is
still the bigger issue, I think. It forces people to go backwards faster and
further. But I think it is a nice market trigger that says that if my minimum
repayment is looking really ugly because the interest rate is too high, then
maybe it will induce me to look for a better deal.[26]
5.30
According to the banks, in any month only a small proportion of
cardholders make the minimum repayment or less, and even fewer cardholders will
only make minimum repayments or less consistently over extended periods. For
example, Westpac told the committee that only 4 per cent of its
customers make the minimum repayment continuously over a 12 month period.[27]
These customers, it noted, are not exclusively low-income earners, and indeed
low-income earners 'tend to pay off their balances more often than higher
income earners'.[28]
Westpac argued that for cardholders who are 'revolvers', the existing card
product meets their borrowing and payment needs.[29]
5.31
The ABA also advised the committee that few cardholders were actually
making minimum repayments on an ongoing basis:
[T]he number of people we are talking about—I am quoting from
memory, but I think this is a ballpark figure—I think we said three to four per
cent make the minimum repayment in any month, but the number of people who only
ever make the minimum repayment, month by month, in a year is very tiny. The
industry data suggests it is less than one per cent. There are not that many
people out there who only ever make the minimum repayment, and, for most people
making minimum repayments, a couple of months later they are back paying more
than that.[30]
5.32
Although the banks suggested few cardholders were in fact only making
minimum repayments, they nonetheless indicated they would either support or
welcome further consideration of a requirement for higher repayments. CBA
suggested a minimum repayment standard would 'help customers pay down their
debt in a timely and responsible manner'.[31]
NAB told the committee that while the matter was complex, 'from our perspective
minimum repayments is a topic and an area that we are more than happy to enter
into a discussion on'.[32]
ANZ also indicated it would be 'happy to see [the minimum repayment] higher',
while noting that the implementation of such reforms would be critical (as
discussed further below).[33]
5.33
Some of the discussion during the inquiry focused on minimum repayment
reforms introduced in the United Kingdom in 2011. As a result of these reforms,
all card accounts opened from April 2011 have a minimum repayment of at least
the total of any interest, fees and charges, plus 1 per cent of the
outstanding balance.[34]
Coles spoke in support of a higher minimum repayment, and referred in this
regard to the UK reforms:
We also have looked at the UK position, and we would be
supportive of changes to repayment terms. We think it would be sensible for
customers because, at the end of the day, credit cards are designed for
short-term borrowing; they are not really designed for long-term borrowing.[35]
5.34
Westpac told the committee that while the idea of higher minimum
repayments was 'directionally correct', it recommended the committee consider:
...something stronger and more targeted: that all credit card
issuers provide an option for customers to pay off their debt within a period
of time chosen by the customer—for example, one, three or five years. This
would become a new feature of the product in our industry. As an alternative,
issuers can proactively offer to targeted customers another product that allows
for faster repayment of long-term debt, such as a personal loan. All customers
should have an easy way to move balances into a shorter amortisation period.
This creates an effective payment plan for the customer. We believe that this
should be a point of mandatory conduct for all credit card issuers.[36]
5.35
Westpac argued against simply lifting the minimum repayment levels:
We do keep making improvements and I think here we have an
opportunity for a small set of customers to make further improvements. But what
I would argue is that simply moving the minimum payment up, whilst it is
directionally correct, would unduly affect the 95 per cent of customers who I
think are getting value. But at the same time, and more importantly, moving the
minimum payment from two per cent to three per cent, or to 2.5 per cent or four
per cent, misses the point, I think. The point is that if we were to give the
best advice to someone with long-term debt we would try to get them into an
amortisation period that was much shorter than that, which is why I think we
need to have a mandatory feature on all credit cards so that the customer can simply
say, 'This is the balance I am revolving on and I can move it and make monthly
repayments that actually make headway.' That is why I suggest something that is
quite a bit stronger than the direction even of increasing the minimum payment.[37]
5.36
A number of witnesses, including those advocating higher minimum
repayments, warned that policymakers needed to tread carefully in designing and
implementing reform in this area. For example, ASIC warned that if the end
result was to exclude certain consumers from accessing credit cards, this could
simply push them into even more expensive and riskier forms of borrowing.[38]
5.37
CBA also cautioned that any shift to higher repayments would need to be
managed in such a way that it did not inadvertently hurt vulnerable customers
or, indeed, push them into financial hardship, observing that when it had
itself increased its minimum repayments in 2008 from 1.5 per cent to
2 per cent, this had created difficulties for a small number of
customers. The bank maintained that these issues were far from insurmountable.[39]
5.38
ANZ indicated that while it would support higher repayments, 'we need to
be careful that it does not affect the people you do not really want to
impact'.[40]
It emphasised that that implementation of any higher repayment would be
critical. This was particularly so given the risk that people might be driven
to payday lenders and the like:
If you make it too onerous you have got to remember that some
people are a little more on the fringe there, and if you suddenly jack it up
you are going to cause some issues for people.[41]
5.39
Treasury also sounded a note of caution on the design and implementation
of higher minimum repayments:
Where that amount might be set—and if there was going to be
investigation along those lines—you would also want to make sure that we were
thinking through all the unintended consequences in the event that people who,
as Senator Dastyari said before, are relying on lines of credit were not tipped
out of the transparent market into the non-transparent market.[42]
5.40
Asked about the risk that reforms to shift people from using credit
cards as long-term debt facilities would push people into even more risky forms
of lending, CHOICE responded:
Any changes we are looking at here do need to come in tandem
with changes to payday loans. There is a review just under way into
small-amount credit contracts. There is a lot of work to clean up that industry
and associated industries, whether that is rent-to-buy industries that are
making people pay more for appliances or whether it is pawnshops connected to
payday lenders. There is a lot of reform needed in that market.
Ultimately, in terms of outcomes and what we are looking for,
it is not to push people into worse products it is to get the big banks to
offer better products for consumers.[43]
ANZ's proposed low-fee,
low-interest, low-limit, high-repayment card
5.41
The committee welcomes the fact that during the inquiry several of the
banks actively considered how they might structure their products to help
customers avoid getting trapped into long-term credit card debt. In addition to
Westpac's aforementioned proposals regarding nominated amortisation periods on
credit card debt, ANZ made a notable contribution by announcing the development
of a low-fee, low-interest, low-limit and high-repayment credit card.
5.42
ANZ explained that if disadvantaged and vulnerable consumers were
prevented from accessing the credit card market entirely, this risked
reinforcing their financial exclusion and could force them into even risker
forms of borrowing, such as payday lending. ANZ told the committee financial
counsellors argue that access to small-balance credit is often critical in
helping vulnerable people manage unexpected costs or get through short periods
of particular financial pressure. ANZ advised that in an effort to help
vulnerable consumers better manage their expenditure, it had begun work on a
low-rate, no-fee, low-limit and high-repayment card. This product, it
suggested, could help vulnerable customers avoid or work through periods of
financial hardship, and steer clear of payday lenders.[44]
Committee view
5.43
Evidence presented during the inquiry suggests that consumers would
likely benefit from a requirement for higher minimum repayments on credit card
balances. The committee is mindful of the need to design and implement any
reforms in this regard without inadvertently hurting disadvantaged or
vulnerable consumers. In particular, the committee would be concerned about any
reforms that inadvertently pushed disadvantaged or vulnerable consumers into even
riskier and costlier forms of borrowing, such as payday lending. At the same
time, the committee does not believe these risks are insurmountable, and would
encourage the government to work with industry, consumer groups and other
interested stakeholders to determine how reform in this area can be best
designed and implemented.
5.44
The committee further recommends that the government consider
alternative approaches to reducing the use of credit cards as long-term debt
facilities. In this connection, the committee notes that while it did not have
an opportunity to fully consider Westpac's recommended approach to credit card
debt amortisation, it believes the idea has merit and is worthy of further
consideration.
Recommendation 7
5.45
The committee recommends that the government consider introducing a
credit card minimum repayment requirement and alternative means of reducing the
use of credit cards as long-term debt facilities.
Balance transfers
5.46
Balance transfer offers, which allow a cardholder to transfer existing
credit card debt to a new card at a discounted interest rate for a specified
'honeymoon' period, are a longstanding and common feature of the Australian
credit card market. While the interest rate and terms of duration for balance
transfers vary widely, zero per cent offers for an extended period
are not uncommon. A September 2015 CANSTAR analysis found that at least
46 cards were seeking to attract new customers with balance transfer
offers of zero per cent for 12 months or longer.[45]
5.47
The same CANSTAR analysis cautioned cardholders considering a balance
transfer to check the interest rate that would apply to any outstanding amount
on a balance transfer at the expiry of the honeymoon period (the 'revert
rate'). CANSTAR noted that for the 46 cards it had identified that were
offering zero per cent balance transfers, the revert rate ranged
anywhere from 10.99 per cent to 21.99 per cent.[46]
CHOICE indicated in its submission that the average revert rate for balance
transfer offers, which it called the 'sting in the tail', was in fact
20.09 per cent.[47]
5.48
The revert rate, and the incidence of people taking up a balance
transfer offer only to find they have made little headway in repaying the
balance within the honeymoon period (or, worse still, found themselves deeper
in debt), was a significant area of concern for this inquiry. The committee
received evidence from a range of witnesses suggesting that balance transfer
offers encouraged (or at least facilitated) poor consumer behaviour and, by
extension, represented a potential debt trap for the average cardholder.
5.49
For instance, ASIC submitted that balance transfers played on the
behavioural biases of consumers:
Optimistic present biased consumers may take up these offers
because they believe they will take advantage of the introductory period to pay
off their existing balances, when in fact their financial situation and
imperfect self-control makes it likely that they will continue to borrow at a
much higher interest rate. Behavioural biases such as overconfidence and
present bias are known to influence how consumers make decisions about
financial offers.[48]
5.50
Mr Pape made a similar point, emphasising that without any change in
behaviour on the part of the cardholder, balance transfers—or, as he termed
them, 'credit card roulette'—simply placed the cardholder at risk of falling
deeper into debt.[49]
5.51
Similarly, Mr Clitheroe told the committee that balance transfer offers
presented a 'debt trap' to consumers who failed to change their behaviour upon accepting
an offer. If a cardholder was transferring a balance, he suggested, this was
likely indicative of an inability to pay off the balance. As such, Mr Clitheroe
suggested that a balance transfer should trigger a process in which the card
provider, as a responsible lender, seeks to engage with and support the
consumer to change their financial behaviour.[50]
5.52
Ms Lane from the Financial Rights Legal Centre also noted that
cardholders often took up a balance transfer, only to further add to their debt
on their new card. She suggested that responsible lending obligations should be
amended to address this problem.[51]
5.53
The Consumer Credit Legal Service (WA) Inc., a community legal
centre that regularly works with disadvantaged and vulnerable consumers
struggling with credit card debt, took an even stronger position against
balance transfers. It argued that balance transfer offers:
...take advantage of consumers with low levels of financial
literacy, who do not understand or consider the actual impact of interest rates
until it is too late. Further, while banks are able to offer honeymoon interest
period credit cards to lure in vulnerable consumers, there is little incentive
for these banks to reduce credit card interest rates in order to become more
competitive.[52]
5.54
A joint submission from the Consumer Action Law Centre and the
Financial Rights Legal Centre recommended that zero per cent balance transfer
offers should be offered for a minimum of two years, and 'for interest-free
periods to apply not only to the balance transfer but to new purchases'. They
recommended that card providers should:
...be required to set the minimum repayment amount on the basis
that the consumer will repay the transferred balance within the 'teaser'
period. In the alternative, there should be restrictions on using the card for
new purchases until the transferred debt is repaid.[53]
5.55
CBA advised the inquiry that zero per cent balance transfer cards should
be banned outright. The bank is the only one of the major banks that does not
offer zero per cent balance transfers. Echoing the abovementioned
arguments, CBA told the committee:
The experience here, and in other markets around the world,
is that customers increase their debt and many do not pay off the debt before
the end of the offer period. It has been our view that such arrangements are
not the right thing for our customers. We believe the committee should consider
a total ban on zero per cent balance transfers, a move that would have our full
support.[54]
5.56
Questioned by the committee, CBA advised that with up to one third of
new applications in the market going to cards offering zero per cent
balance transfers, its decision not to offer zero per cent balance
transfers made it 'very hard for [CBA] to compete on a long-term basis'. However, CBA maintained that it did not offer
zero per cent balance transfer because such offers were ultimately
not in the best interests of customers.[55]
5.57
Balance transfer offers are widely seen by card providers as a means of
attracting new customers and increasing their market share. Mr Graham Hodges,
ANZ's Deputy CEO, confirmed that balance transfers were a loss leader for the
bank, but were nonetheless seen as a valuable means of attracting and retaining
customers.[56]
The call by CBA—the bank with the largest share of the credit card market in
Australia—to ban zero per cent balance transfers was met with some
scepticism by some other card providers. In particular, Mr Cahill from NAB told
the committee that it was 'interesting that the bank with the largest market share
does not support zero balance transfers'. Balance transfers, Mr
Cahill argued, were very much a part of the 'competitive mix' in a market that
was 'highly competitive'.[57]
5.58
Mr Cahill also challenged the view that customers utilising balance
transfers offers were financially vulnerable or likely to be worse off as a
result of having accepted an offer. According to Mr Cahill, balance transfer
customers were in fact 'four times less likely to move into delinquency that a
standard credit card holder'.[58]
In light of this finding, NAB took the view that:
...zero dollar balance transfer can be an extremely useful tool
for customers. It allows them to consolidate debt and get their finances under
control. We do not believe it leaves the customers...in financial stress. So we
support zero balance transfers as part of a competitive industry.[59]
5.59
ANZ also took issue with the notion balance transfer offers represented
a 'debt trap', telling the committee that about 70 per cent of its
clients on balance transfers (which made up 15 per cent of its total
outstanding balances) paid off the balance in full by the end of the balance
transfer period. (This figure, it noted, included those people who transferred
their outstanding balance elsewhere.)[60]
Mr Graham Hodges, ANZ's Deputy CEO, argued that balance transfers were a
'legitimate area for competitive activity'; if they were banned, he suggested,
competitive activity would simply shift elsewhere within the market.[61]
5.60
Mr Lindberg from Westpac took what might be described as the middle
position, suggesting that while zero per cent offers could be useful
for customers, their duration should be limited in order to encourage customers
to reduce debt faster:
Balance transfers are an effective way to consolidate and get
on top of debt. In my experience, however, they are being used too often to
extend debt, and all too often debt continues to build, even during the
transfer period. We should encourage customers to face their outstanding debts
sooner. This may reduce industry balances, but we believe it is the right thing
to do for customers.[62]
5.61
Westpac suggested it was trying to balance the value that many
customers enjoyed from balance transfers with the fact that other customers
simply end up 'kicking the can down the road' rather than addressing their
underlying debt:
What we want to do is find a way to support customers to face
into their debt, give them a reasonable period of time—but not such a long
period of time that it goes to the back of their mind—and then move forward.
That is why we are suggesting that we do something to limit
balance transfers. We gave real consideration to whether we should make a
recommendation to this committee to stop them altogether. We decided that that
would not be in the best interests of customers because there are so many who
use it appropriately. So we tried to balance the two by saying, 'Let's have
some limits.'[63]
Committee view
5.62
The committee shares the concerns expressed by a range of witnesses that
balance transfer offers can present a 'debt trap' for consumers. In the worst
instances, a consumer may take out a new card in order to take advantage of a
seemingly compelling balance transfer offer, and not only to fail to pay off
the balance in the honeymoon period but also run up further debt on their old
card (which they have not cancelled) and their new card. Equally, the committee
notes that balance transfers can be used to a consumer's benefit, and do
appear to be an important part of the competitive mix in the Australian credit
card market.
5.63
In order to balance the potential benefits and risks of such offers, the
committee believes serious consideration should be given to implementing new
obligations on card providers in relation to balance transfers. In particular,
credit card providers should be required to notify customers when an interest
free period is about to expire, and if there is an outstanding balance
remaining on the card, to actively engage with the customer to ensure the card
is the most appropriate product for them.
Recommendation 8
5.64
The committee recommends that credit card providers should be required
to make reasonable attempts to contact a cardholder when a balance transfer
period is about to expire and the outstanding balance has not been repaid. In
doing so, the provider should be required to initiate a discussion about the
suitability of the customer's current credit card and, where appropriate,
provide advice on alternative products.
Financial literacy
5.65
Treasury underlined the importance of financial literacy in helping
people avoid or manage credit card debt, telling the committee:
Where consumers have low levels of financial literacy or
suffer from behavioural biases, high credit card interest rates can contribute
to debt traps for those on lower incomes.[64]
5.66
There are a range of financial literacy programs and informational tools
relevant to credit cards that are currently available to consumers and provided
by both industry and government. The banks have their own programs and
initiatives to help improve general financial literacy, including the use of
credit cards. For example, ANZ told the committee that it had invested over
$34 million over the last ten years in financial literacy programs such as
MoneyMinded and Saver Plus, which were delivered in partnership with government
and community organisations. The programs, ANZ reported, 'have a demonstrated
track record of improving the basic budgeting, saving and money management
skills of lower income participants, including the use of credit cards'.[65]
5.67
The ABA advised the committee that individual banks and the industry as
a whole (through the ABA) was already making 'a very significant investment
into financial-literacy programs'. According to the ABA, the major banks
typically invested between $90 million to $300 million per year in financial
literacy and financial inclusion programs.[66]
The ABA advised the committee that, in addition to legislative and regulatory
protections for credit card customers, 'the ABA has augmented these protections
with a number of initiatives to improve the financial literacy and
understanding of customers'.[67]
5.68
ASIC's MoneySmart website also provides information and other resources
to customers to assist them in the selection and management of credit cards. In
addition to information about how to avoid fees and charges, the website
provides a credit card calculator to help consumers calculate how much they
could save be making higher repayments.[68]
5.69
More broadly, ASIC has national responsibility for co-ordinating
financial literacy, and works to this end with the Australian Government
Financial Literacy Board. As part of this role, ASIC developed and published
the National Financial Literacy Strategy 2014–17. According to a
foreword by the then Parliamentary Secretary to the Treasurer, the Hon Steven
Ciobo MP, the strategy 'provides a practical framework for action for
stakeholders across the government, business, community and education sectors
over the next three years'.[69]
5.70
Notwithstanding the current financial literacy offerings, both in
relation to credit cards specifically and financial literacy more broadly, some
witnesses suggested there was a need for more targeted efforts to improve
understanding about credit cards for particular consumer cohorts. For example,
Mr Symons for SocietyOne told the committee that it would be worth exploring:
...whether there are not things that we could be doing that are
not so much just general literacy and awareness raising but really more laser
targeted efforts at people who potentially have these carry-forward balances.
We could apprise them of options other than the ones that they have today.[70]
Financial literacy in schools
5.71
Mr Scott Pape, also known as the 'Barefoot Investor', argued that even
with strong disclosure requirements and general financial literacy efforts,
shifting the financial behaviours of adults was 'incredibly hard':
Jenny Craig and I will never be out of business so long as
people enjoy eating and spending. That is what I have learned over the past 12
years of being the Barefoot Investor, and the banks understand this better than
anyone, which is why they basically went 'meh' in 2012 when the government
began forcing them to include a minimum repayment warning table on statements,
saying that a $5,000 credit card debt will take you 33 years to pay, at which
time you would have paid 17 grand. Shocking? Yes. Did it make a difference? No.
Today we have a $51 billion credit card problem, and it is growing. The truth
is that successfully managing your money is 20 per cent knowledge but 80 per
cent behaviour and, as I have said, change is really hard.[71]
5.72
For this reason, Mr Pape stressed the importance educating young people
whose financial behaviours are not yet fully formed:
At schools, kids learn some basic life lessons. They are
taught to avoid the sun because it can cause skin cancer and they are taught
that smoking is bad for them because it can cause heart disease and lung
cancer, yet they are not taught about the dangers of credit cards and how they
can cause financial cancer. Get that message across and young people may start
to see the truth. If you spend less than you earn, credit cards are irrelevant.[72]
5.73
Mr Pape was particularly critical of the banks taking a lead role in
educating children about finance. He contended that having CBA teach children
about money through its Dollarmites program was akin to having 'Ronald McDonald
teaching our kids about nutrition'.[73]
Mr Pape added that when it came to teaching financial literacy in schools,
programs such as ASIC's MoneySmart Schools initiative were better placed to
provide 'independent, unbiased financial literacy and education'.[74]
He added that financial literacy is:
...a core life skill. It is the one thing that, when you get
out of school, and even before you get out of school, you will be tested on
every day of your life. It is far too important not to be a core part of the
schooling process. It is far too important to allow banks to dictate and hand
out their marketing material in schools.[75]
5.74
Ms Pam Mutton, a financial counsellor with Bentleigh Bayside Community
Health who appeared before the community with the Consumer Action Law Centre,
echoed Mr Pape's concerns regarding the CBA's Dollarmites program:
The Commonwealth Bank practises cradle-to-grave banking. It
starts in school, and you go all the way through. They also use the fact that
they have the engagement through that Dollarmites accounts. When kids turn 18,
they send them the application for their very first credit card.[76]
5.75
However, when asked whether financial institutions or ASIC should
deliver financial education in schools, Ms Mutton responded that they should
work in cooperation:
I think it needs to be across the legislative framework and
the actual institutions need to take some responsibility. At the institutional
end, if they learn to have some responsibility about the information they are
providing to their consumers from a very young age, then they will take that
through their corporate ideologies, and ASIC underpins that. [77]
5.76
ASIC, it should be noted, already runs a MoneySmart Schools Program,
which delivers financial literacy and education in schools. According to ASIC's
website, 42 schools across the nation are currently registered as MoneySmart
Schools.[78]
ASIC's MoneySmart Teaching program also provides cost-free professional
development and resources for teachers to enable them to effectively teach
young people about money. ASIC has indicated that it hopes to provide
professional development to more than 20,000 teachers across Australia by 2017.[79]
5.77
It should be emphasised that the teaching of financial literacy in
schools is by no means limited to ASIC's MoneySmart programs. On the contrary,
the teaching of consumer and financial literacy is part of the Australian
Curriculum, and is guided by the nationally endorsed education learning
framework, the National Consumer and Financial Literacy Framework.[80]
Nonetheless, it might be noted that while there are currently around 42 schools
nationally registered as MoneySmart Schools, the CBA's School Banking program
(of which the Dollarmites account is only one component), is currently
delivered to around 275,000 students nationally, and CBA is currently investing
a further $50 million to expand the program and expects it will reach
500,000 students in 2016.[81]
5.78
CBA refuted the criticisms of the School Banking program, telling the
committee that the program was intended to 'help children achieve their
educational potential', was offered on an opt-in basis to both schools and
parents, and was loss-making. The main purpose of the program, according to
CBA, 'is to provide young children with a basic understanding of core financial
values and money management skills'. CBA also strongly rejected 'any suggestion
that School Banking encourages poor financial management practices or
encourages children to adopt credit cards'.[82]
5.79
CBA added that it did not 'capture data as part of our school banking
program and integrate it into the rest of our banking program'. Rather, the
data captured through the School Banking program was maintained in a separate
database. CBA advised the committee that unless a customer had an existing home
loan, they did not market credit cards to 18 to 21 year olds.[83]
They also stated that when a customer turned 18, there was no flag to indicate
they had become a CBA customer through the School Banking program.[84]
Committee view
5.80
The committee believes that financial literacy tools and programs could
have an important role in helping Australians better understand credit cards
and the risks inherent in credit card borrowing. The committee encourages the
government and industry to work together to ensure these programs and tools are
carefully targeted toward those consumers most at risk of using credit cards as
a long-term borrowing facility.
5.81
While there are opportunities to better target financial literacy tools
and programs to help improve the behaviours of some adult credit card
customers, the committee agrees that financial literacy efforts should have a
priority focus on educating young people about personal finance, including, but
by no means limited to, credit cards. While the committee notes the concerns
expressed during the inquiry about industry involvement in school banking
programs, it considers banks can and do make a valuable contribution in helping
children learn about personal finance. However, the committee considers that
government should take a lead role in ensuring children are learning about
personal finance, including the risks of credit card borrowing. The committee
welcomes initiatives such as ASIC's MoneySmart Schools Program, and considers
there is merit in rolling programs such as this out more broadly.
Recommendation 9
5.82
The government should consider expanding financial literacy programs
such as the Australian Securities and Investments Commission's MoneySmart
Schools Program.
Hardship supports for people struggling with credit card debt
5.83
The committee received evidence from a number of community support
bodies and financial counselling agencies, and from people who had personally
struggled with credit card debt. Ms Katherine Temple, a policy officer with the
Consumer Action Law Centre in Melbourne, provided the committee with some
insight into its work with people struggling with credit card debt, and by
extension the scale and severity of the problem in the community:
Consumer Action's free telephone financial counselling
service, MoneyHelp, receives at least 15 calls per day from people struggling
with credit card debt. Over 50 per cent of our callers have credit card debt
exceeding $10,000, over 28 per cent have debts exceeding $20,000 and nearly
every week we get a call from someone with credit card debt exceeding $100,000.
However, the number of people contacting MoneyHelp for assistance is likely to
be only a small proportion of those who are struggling with credit card debt.[85]
5.84
The committee also heard how the harm caused by credit card debt can be
devastating for individuals and the broader community. Ms Temple told the
committee that credit card debt:
...can lead to and exacerbate the marginalisation of struggling
consumers. It can result in significant financial hardship and, in some cases,
bankruptcy and the loss of the family home. At an acute level, credit card debt
can lead to family violence, breakdown and a deterioration in health, including
mental health. It can also have a long-term impact on the capacity to provide
for health, retirement and education. These are serious and profound impacts.
Taking appropriate steps, including regulation, should be an absolute priority
for policymakers.[86]
5.85
Westpac told the committee that it had 'proactively offered' 277,000
credit card holders personal loans where the bank believed it might be a more
appropriate product. Cardholders in this category included those who are only
making the minimum repayment each month for a prolonged period of time.[87]
5.86
Similarly, NAB told the committee that it sought to 'proactively
identify customers showing signs of financial stress'. When customers did enter
hardship, NAB told the committee, they were provided with 'support through a world-class assistance
program that was developed in partnership with the Kildonan UnitingCare'.[88]
NAB indicated that less than one per cent of all credit card customers had
entered hardship in the previous 12 months, and that the overwhelming majority
of these customers had returned to commercial terms within a short period
(89 per cent within 30 days, and 95 per cent within 90
days).[89]
NAB's advice was consistent with industry data referred to by the ABA, which
indicates:
...less than one per cent of all customers, not just credit
card customers, are in a hardship arrangement with their bank. Most customers
experiencing financial difficulty have their financial situation restored
within three to six months.[90]
5.87
ANZ advised that it had a well-defined process for customers
experiencing hardship. This process, ANZ explained, might include discussions
with customers about how to minimise the level of interest paid on current
debt, and fixed payment plans that might assist in this regard.[91]
Appearing before the committee, ANZ further advised that:
...0.3 per cent of our credit card customers have sought
assistance through our hardship program. Nine out of 10 of those customers that
are in hardship are there because of unexpected events and, primarily, loss of
income from unemployment or divorce or illness, not because of financial over-commitment
at the time the card was issued.[92]
5.88
For its part, American Express advised the committee that it actively
monitored accounts to help its cardholders avoid hardship:
It is part of our service ethos. If it is clear that a card
member is in difficulty—for example, they are revolving more than they have in
the past or their spend patterns are changing dramatically—we contact them
proactively and offer support if required. We do not wait until we are asked.[93]
5.89
In addition to the financial hardship processes and initiatives
implemented by individual financial institutions, the industry as a whole has
taken a number of steps to improve hardship supports. The ABA advised the
committee:
In 2013 the banking industry implemented its financial
hardship initiative in consultation with Financial Counselling Australia and
other organisations to help vulnerable and disadvantaged Australians. We
released an industry guideline going beyond legal requirements to help these
customers. This year the banking industry further strengthened this initiative.
Consumers can now get more information about the type of support that is
available, including when a debt reduction or debt waiver may be appropriate.
Banks also provide a range of resources, including the Doing it tough? website,
to give consumers access to information about assistance and the contacts for
banks' hardships teams. Australia's banks provide a range of products and
services to consumers, including credit cards, and it is in both parties'
interests that people's financial obligations can be met.[94]
5.90
The Consumer Action Law Centre welcomed the fact that the banks had put
real effort into training their staff in the management of customers
experiencing hardship. However, the Centre suggested that, in general, a
conversation about hardship still needed to be initiated by a customer, and a
customer often needed to explicitly state that they were experiencing hardship
before hardship processes could commence.[95]
The Centre argued that this was a particular problem for cardholders who might
be making minimum repayments on time, yet still struggling to manage their
credit card debt. Such customers, it noted, were unlikely to:
... self-identify as being in hardship. The system is set up so
that, if you make your minimum repayments, which could mean it will take
decades before you pay off your debt, you are still 'paying your bills on
time'.[96]
5.91
Mr Greenwood suggested that if a customer had only made minimum
repayments for an extended period (for instance, six or 12 months) this should
trigger some sort of mandatory intervention on the part of the card provider.
This could take the form of engagement between the card provider and the
customer to ascertain whether the customer needed additional support or advice:
For example, if a person has got into 10 grand worth of
credit card debt and they have not paid it back over 12 months, the fact is
that somebody at the bank or some form of communication with that person should
reach out and say, 'We think you've got a problem.' And I think you could do
that. I do not think that that would be a problem at all in terms of trying to
be proactive in trying to control the real problems inside credit card debt.[97]
5.92
While hardship processes and support from card providers are very
important, the committee also heard from a number of witnesses about the
critical role played by the financial counsellors. A joint submission by the
Consumer Action Law Centre and the Financial Rights Legal Centre recommended
increased funding for the 'promotion and delivery of financial counselling and
support services to assist those struggling with credit card debt'.[98]
CHOICE also told the committee:
We desperately need greater funding for financial
counsellors. This is a bit of an 'ambulance at the bottom of the cliff'
problem, but it is currently a very underfunded ambulance that is dealing with
a very big problem.[99]
Committee view
5.93
The committee welcomes the steps that a number of financial institutions
and the industry as a whole have put in place to support customers struggling
with credit card debt. At the same time, the committee is concerned that
consumers who are struggling with credit card debt but not actually in default,
are not receiving adequate support and advice from their bank to help them manage
their credit card debt.
Recommendation 10
5.94
The committee recommends that credit card providers should be required
to make reasonable attempts to contact a cardholder in cases where a cardholder
has only made the minimum payment for 12 consecutive months on interest bearing
balances, and thereby initiate a discussion about product suitability and
alternative lending products.
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