Australians loading up on credit cards this Christmas, assuming they can transfer the debt to a card with an interest-free period next year, are in for a shock.
New rules from January 1 mean some people who apply for credit cards will be either refused or offered a lower credit limit. That includes those applying for a balance-transfer card with a zero-interest period.
Under the rules, credit providers must check the debt-servicing capacity of customers more thoroughly before issuing cards.
For the first time, a credit provider will have to satisfy itself that an applicant has the financial capacity to repay the card's credit limit at its interest rate within three years.
Figures from MoneyPlace, which provides personal loans, suggest if someone assessed as having free cash of $500 a month and a credit card limit of $20,000 were to ditch their card and apply for another, from January 1 they could be offered a credit limit of only $13,000.
That's only a rough guide as many factors go into determining a person’s capacity to repay debt besides their disposable income.
Midway through next year the rules tighten further, when credit providers will have to include any other cards the applicant has, under the same rules, rather than just the card being applied for.
Lenders ramp up advertising for their interest-free credit card deals in January and February, when the bills from Christmas spending are due.
Christmas spending
“Many card holders who go into Christmas and spend, thinking they will be able to transfer the balance just like they did last year – may find that’s not going to work,” says Stuart Stoyan, the founder of MoneyPlace.
The new rules are administered by the Australian Securities and Investments Commission, which recently confirmed the changes would go ahead after its earlier review of credit cards found about one in six of those with cards were unable to repay the debt, including those in delinquency.