Before you start contemplating your New Year’s resolutions, there’s an important change to the way credit cards are being assessed that you need to know about.
Earlier this year ASIC, the corporate regulator (in other words, the body that makes sure big and small companies are doing the right thing) released a report that showed some issues with Australians and their credit cards.
One in six of us were struggling to repay our cards every month, and we’d got ourselves more than $45 billion in debt!
To help this, ASIC is changing the regulations around credit cards. This won’t affect your existing cards.
In very simple terms what it means is that the credit limit you would be able to get right now, will be less in January.
Right now, credit card providers will make sure you have enough leftover cash (disposable income) at the end of the month to pay the minimum monthly payment (MMP).
In January, they will need to make sure you can pay off the full limit (ie $10,000) in three years.
Here is it in numbers (this is a guideline and would be differ based on lender and your individual circumstances).
If you have $500 in disposable income and right now (Nov 2018) you could qualify for a $20,000 card (based on a 2.5% MMP), from January 1 2019 you the most you could qualify for a $13,000 card (based on a 3.8% MMP).
That’s quite a difference.
What does this mean?
ASIC says that most of us have limits of $5000 or less on our cards. If this is the case, these changes won’t affect you greatly.
But an example of where it will hit is people who are looking to use 0% Balance Transfer cards.
If you currently have a $20,000 credit card debt, from Jan 1, you may not be able to use a balance transfer for the full amount.
So while you have previously been able to move to a new balance transfer pretty easily, now you might get stuck on a higher rate card.
What can I do?
Part of ASICs reasoning is to stop people using credit cards as longer-term debt.
Instead, people will need to use other forms of credit like debt consolidation loans to pay off their debt.
There are advantages to this.
A credit card debt of $20,000 will take you more than 35 years to pay off if you pay a minimum amount of $25 a month (or 2.5% MMP – whichever is higher).
If your card has a MMP of 2% (the lowest possible) it will take around 81 years and 4 months and you’ll pay an estimated $97,392 in total interest.
A personal loan of $20,000 paid off over three years will cost far less in fees and interest.
And a final note. If you do consolidate your debt, make sure to close down your cards so you don’t find yourself in a spiral of debt!