Australians are drowning in credit card debt, and we are paying the highest credit card interest rates in the world. Our " big four " banks dominate the provision of credit and they are charging interest rates of 21%. This compares with just 3% in Japan and between 9 and 11% in Europe.
The credit providers justify their high interest rates on the grounds that these debts are not underwritten with collateral security. Interest rates for car loans are lower because the car can be repossessed if repayments are not met and in commercial loans the money is advanced against assets such as property, shares or business activity. With credit card debt, the risk is higher because the applicant is not required to lodge security for the loan.
That is precisely where the credit provision system in this country fails. The credit providers are taking the " shotgun " approach : Providing credit to almost all applicants on the basis that the number of defaults will be submerged in the greater number of people who actually fully repay their loan - at a high interest rate.
One of the tactics offered to make credit cards more attractive is the requirement that repayments may be as low as just 2% of the outstanding balance each month. If $ 1000 was the amount on loan and the borrower made only the minimum repayment each month, it would take seven years and nine months to settle the debt, and the interest would have amounted to $ 859.
The credit card system in Australia seems designed to deliberately get people into financial trouble. The banks are literally showering people with raised credit limits because of the huge profits arising from those extortionate interest rates. People with no financial skills are being encouraged to spend money well beyond their means, and insolvency firms are finding many people seeking help with debts in excess of $ 50,000 - which they have no hope of ever settling.
This situation will persist as long as the credit provision laws remain unchanged. It is essential that obtaining and providing credit be subject to mutual obligations. The credit provider should ensure that the limit imposed is within the applicants capacity to service the loan and if that amount has been recklessly exceeded, it should be within the power of a solvency court to declare that excess null and void.
Before the advent of credit cards, people seeking a loan usually approached their bank manager to apply for an overdraft. They needed to make their case and convince an astute banker that the thinking and planning behind the application was sound. Exactly that same principle needs to apply to credit card applicants - and if the provider strays too far above prudent loan limits - the provider should share in the consequent loss.
If an eighteen year old girl with no other income than the occasional shift behind the counter at the local cafe at twelve dollars an hour is allowed to rack up a credit card debt of twenty thousand dollars, then the party managing her credit limit has been grossly incompetent.
It will take a law change to make lenders share responsibility in setting reasonable credit limits to reign in this attitude to " easy money " that is getting so many people into financial trouble - and bring down interest rates by decreasing " bad debts " !
No comments:
Post a Comment