Credit card reforms ahead

The way lenders treat credit card consumers could be getting an overhaul, with the government planning rules that would dictate stricter warnings about minimum repayments, and let borrowers better weigh up creditors.

The Ministry of Business (MBIE) yesterday released a discussion paper asking for feedback on regulations related to the loan shark-crackdown Credit Contracts and Consumer Finance Amendment Act, which comes into force on June 6 next year.

MBIE wants the public’s opinion, by December 1, on what information lenders should disclose on costs of borrowing and what a minimum repayment warning should look like.

Problems with the current disclosure regime include borrowers being unaware of the consequences of just making the minimum payment on their credit card bills, and lenders disclosing information in different ways, making comparisons hard.

The proposed regulations, which need to be ready by June, mean the lender must display all costs of borrowing better to consumers, including credit fees, default fees and interest charges.

“The purpose of requiring creditors to publicly disclose their costs of borrowing is to assist borrowers to more readily compare different products and shop around for a product that suits them,” MBIE says.

The current practice of lenders is to include a minimum repayment on monthly credit card statements, often just 2-3% of the balance owing, which “can impact the behaviour of card holders by ‘anchoring’ the impression for consumers that just paying this minimum amount is acceptable,” says MBIE.

The regulations would make lenders include a warning about increased costs when paying the minimum, a step that has recently been introduced overseas.

The US and Australia warnings include calculations of the savings made by paying more than the minimum repayment each month. MBIE says academic evidence suggests this strategy is very effective at changing repayment behaviour. In the US, 30% of cardholders who read the warnings said it caused them to increase their payments or reduce their use of credit.

In contrast, the UK warning is a statement only, with no calculations required. This method is less effective but would mean less compliance costs for lenders – which the regulations also have to take into account.

The regulations would also make sure lenders improve their model disclosure statements, provided to consumers before a credit contract is signed. This would include adding a statement about the consumer’s right to apply for relief on grounds of unforeseen hardship, and adding the contact details of the lender’s dispute resolution scheme.

MBIE also wants opinions on how proportionate rebates should be calculated for extended warranties and repayment waivers, when consumers repay early.

Commerce and Consumer Affairs Minister Paul Goldsmith says the regulations will mean consumers can get the information they need to make good decisions when borrowing money.

“The reforms aim to promote fair, efficient and transparent credit markets and promote competition, consumer choice and protection.”