Small business has backed a Labor election proposal to pressure banks to waive fees for credit card holders if they exceed their credit limit, but the banking industry says the reforms are unnecessary and that households are “well in control” of their finances.
Prime Minister Julia Gillard has also said a Labor Government will stop lenders from automatically increasing limits on credit cards, with customers needing to give their consent before a limit can be broken. New laws would also ensure repayments go towards the debt accruing the highest amount of interest.
Council of Small Businesses of Australia chief executive Peter Strong says a ban on fees for exceeding credit limits would make sense for small businesses, which often rely on credit cards for finance.
“This would be a good move, and it would be a benefit for smaller businesses. But we’ve got to make sure the banks don’t try and pass the fees back on to this through other methods,” he says.
“There are a lot of changes going around in credit laws right about now, and we know there are a lot of small businesses that are concerned they’ll have to start paying back some of these costs in other ways. We don’t want that to happen.”
But the Australian Bankers’ Association says the proposals are unnecessary, saying that most people use their credit cards responsibly.
Gillard told reporters in Melbourne yesterday credit cards and related fees are an area of “community concern”, and clearer regulation is needed due to the sheer number of cards being approved – 150,000 new cards each month.
“Lots of Australians would have got a shock when they got their credit card bill and they’d run up debts over what they thought was their limit,” she told reporters in Melbourne.
“Lots of Australians would have got a shock when they realised how quickly interest was going to escalate on their credit card and that’s often because even though Australians seek to shop around, they don’t have the ability at the moment to compare interest rates because they’re not displayed off the same basis.”
Another proposal would ensure credit card limits are not automatically increased. Gillard says she would stop this by allowing customers to set their own credit limit, and by stopping banks from offering an “upper limit” on applications.
Minister for Financial Services Chris Bowen also told reporters these types of offers to increase credit limits should only be sent if the customer allows them.
”Many people say to me when they are in difficulty they get these unsolicited credit extension offers saying, ‘We can increase your credit limit by $5,000’,” he said.
”It is very tempting, but it’s often not the right thing to do. We will change the law so you can only get credit extension offers if you sign up for them from the beginning.”
The Government would also ensure credit card providers show details on how long it would take a customer to pay off their debt if only minimum payments were made. Gillard says this will help customers who are “weighed under by credit card debt”.
Strong says these proposals are all well and good, but small businesses should be protected from situations where lenders could pass on costs to customers in other ways.
“There could be situations where they could bring up new charges and so on, and that shouldn’t be allowed to happen. If a customer goes over their limit there is no real cost to the bank, so they’re just using it for gouging. The costs should stay out.”
But the banking industry disagrees. ABA chief executive Steven Munchenberg said in a statement most people are using their credit cards responsibly and these laws aren’t needed to protect these customers.
“The vast majority of Australians use their credit card sensibly and responsibly. Credit cards give us a convenient service, allowing spending to be brought forward and paid later, which can be very useful for managing spending between pay periods. The evidence is that credit card default is related to unemployment, illness and family breakdown, not bank marketing.”
“When an offer of a credit card or credit limit increase is made by a bank, the service is not instantly provided. The customer must still fill in a form to accept the offer. This means the customer has to make a decision to apply for the credit card or accept the credit limit offer. Customers have a choice – while a credit card or credit limit is offered, the customers can always ignore or decline the offer.”
Munchenberg says policy proposals shouldn’t cause unintended consequences for customers, and noted major banks have already reduced a number of different fees, including limit fees.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
