The impact of reforms to responsible lending assessments for credit cards, which took effect in January, will be extended next month when they are incorporated into the assessment of applications for other credit products.
Since the beginning of the year, applicants for credit cards have had to demonstrate that they can pay off their credit limit over three years, rather than merely make minimum monthly repayments.
The three-year period applies to new credit card applications and credit limit increases.
From July 1, when a consumer applies for other credit, such as a home loan, personal loan or car finance, the lender will have to consider applications on the basis that consumers with credit cards can repay their full obligations within three years.
This could, in some circumstances, make credit harder to get or mean that credit limits are reduced.
Under the credit card responsible lending rules, the credit provider must assess the suitability of a credit card contract or limit increase according to whether the consumer could repay an amount equivalent to the credit limit within three years.
Under the old rules, a credit contract was deemed unsuitable if it was likely that the consumer would be unable to comply with their obligations under the contract or could only comply with substantial hardship. Under this rule, card issuers usually made an assessment of the borrower’s ability to meet the minimum required repayments – typically 2 per cent of the outstanding balance.
The new rules also say that when assessing a credit card application, the credit provider must assume that the consumer is being charged the highest rate of interest that can be applied under the contract over the three-year period.
The credit provider must also assume that if a consumer has other credit card contracts the consumer is making repayments under those contracts sufficient to repay the limit within three years.
The credit card responsible lending rules are part of a package of credit card reforms that have come in over the past year. Other changes include a prohibition on card providers offering unsolicited credit limit increases, simplification of the calculation of interest charges and a requirement that credit providers make it easier to reduce credit limits or terminate accounts more easily.
An existing prohibition on written credit limit offers was widened to cover all forms of communication, and an informed consent exemption was removed.
On the calculation of interest charges, card issuers can no longer impose interest charges retrospectively to a card balance, or part of a balance, that has had the benefit of an interest-free period.
Finally, credit card issuers must provide an online means for the consumer to make a request to reduce their credit card limit or terminate the contract. If a consumer makes a request to reduce their credit limit or terminate their contract, the credit provider must not make a suggestion that is contrary to the consumer’s request. They must take reasonable steps to ensure that effect is given to the request.