Banks need to find some middle ground between prudent lending and open business
I think most of you will agree that in the past getting approved for a credit card wasn’t exactly difficult. I’ve heard some jokingly say that if you had a pulse you could get a card. A little cynical perhaps, but the fact is banks loved approving credit cards. It’s no mystery why, as where else could they generate those sorts of returns?
I’m sure you recall going to a shopping centre or airport and being accosted by an overly enthusiastic bright-eyed credit card salesperson. They couldn’t wait to get you a nice, new shiny credit card, perfect for buying things you didn’t need, with money you didn’t have. Between letters and emails sent by the banks with headings like, “You have been approved!” before an application had even been lodged, to credit cards being offered by anyone from supermarkets to airlines, the banks’ addiction to credit cards was obvious.
For better or for worse this may all be about to change. New regulations with regard to credit cards came into effect on July 1st with more to follow early next year.
One of the big issues being looked at is the time it takes for many people to pay off their credit cards. I can’t think of another type of loan where, with minimum payments, the loan may take longer than the borrower’s lifespan to retire. I’ve seen many credit card statements where the micro writing at the bottom of the page says something like, “At the minimum payment this debt will take 72 years to pay off”. I know life expectancy is improving, but come on! Can you think of another type of loan where the payments would outlive the borrower?
The government is onto this and is concerned about people that cannot pay down their credit cards within a reasonable period and are being exposed to high interest charges as a result. While the banks are publicly agreeing with this, the cynical side of me feels they would be quite happy to leave things as they are.
Following on from this, ASIC recently produced a report which put forward that credit card applications should be assessed on the basis that the credit limit can be retired within three years. It’s looking like this will become policy starting January 2019.
This will be a game changer and will instigate a massive change to how credit card applications are assessed. It’s a welcome change as it will help save people from themselves and hopefully ease household debt levels that seem to be ever increasing, with much of it on credit cards. One thing is for sure, it will mean getting approved for a credit card will be much tougher and this may even result in the review and possible adjustment of current credit card limits.
The days of the banks pushing limit increases are also over. It wasn’t long ago that people would receive endless letters and emails offering to increase their limits. It always struck me as odd that when someone was applying for a home loan they had to provide endless amounts of supporting information, but if they wanted a credit card it was often just a few mouse clicks away.
It appears the banks’ desire to benefit from high interest generating products clouded their judgment when applying sensible lending policies. In other words, the higher the return the lower the scrutiny.
New regulations now prohibit banks from pushing unsolicited credit limit increases which is a very good thing, as offering more and more credit to often venerable people was in my opinion predatory behaviour and not at all responsible.
The royal commission continues to reveal questionable behaviour by the banks and I feel further reform is on the way, but I do have a concern.
While we all want the banks to behave, we’re already seeing lending tightening up and this is causing real issues for people and businesses— and potentially the economy. Many people are quick to cry foul of the banks however let’s not forget that we are a credit-driven society and if credit dries up, everything else tends to dry up too and we all suffer.
I would like to think some middle ground will be found, where banks will act more responsibly when approving credit, but will remain open for business with providing credit in general.
John Dickinson is the director of DebtX Mediation Services, a debt mediation company focused on helping people regain financial control through the reduction and elimination of their debts. Learn more at www.debtx.com.au.