The Credit Card Trap !

According to the Australian Securities and Investment Commission ( ASIC ) a vast number of people should not have a credit card because they do not have the ability to safely manage their money.  A major credit review has delivered the sad news that over two million Australians - and that is 18.5% of the population - is stuck in a fifty billion dollar debt cycle.

This ASIC review is disheartening.  It disclosed the problematic litany of credit card holders who are in arrears on their repayments and who never manage to pay off their outstanding debt.  This is debt they would never have accrued if they had needed to put cash on the counter to obtain the goods and that magic credit card is regarded as a " money tree ".    We all wish we had one of those growing in our garden.

In all started in 1974 when the Australian banks launched Bankcard.  Before that the more wealthy had access to store credit cards, but " ordinary " people obtained major items by the use of hire purchase agreements, or the " never never " as it was known.  Bankcards arrived through the mail and Australians discovered the joy and ease of the " buy now - pay later " society.  Bankcard was only acceptable within Australia and it was eventually replaced with credit cards applicable internationally.

A credit card account is an expensive way to borrow money.  The interest rate is usually above twenty-percent and in the quest for volume some cards are offering to transport unpaid balances into new accounts with an interest free period of years to apply.  If that balance is unpaid after that interest free period, draconian interest levels come into force.

ASIC  is clamping down and will force credit lenders to reform their acceptance of new clients.  The will need to assess their customers ability to repay when setting credit limits and apply new guidelines to determine that the card holder is able to repay credit card debt within a reasonable period.   One of the known money traps is people holding several credit cards and trying to balance repayments on overall unsustainable debt.

This concentration on ability to pay will put existing customers under pressure.  Many will find their credit limit reduced and eventually those who handle credit responsibly may find interest rates lowered as unrecoverable debt write-offs are reduced.   The majority of people who handle credit responsibly are paying for credit insolvency.

It is simply a fact of life that not all people are emotionally able to manage their money and putting a credit card in their hands leads to disaster.  It is up to the issuer to determine that risk and set both acceptance and limits accordingly.