Get to know your New Credit Card Laws

Get to know your New Credit Card laws

New laws about credit card debts will be phased in from January 2019 and will have a long-lasting impact on your ability to refinance a loan, or even just apply for a mortgage.

There's a new problem in your pocket.

Read in this article

Weaning Australians off their credit cards - there will be tears

Australia's financial regulator ASIC has indicated a new approach to the future of credit card use. 

Their report would suggest an approach that could be summarised as,

'Credit cards should be used for short-term debt and if you're going to have medium-term debt, that's more appropriate for a personal loan'.

Sounds simple right?

This will create many unintended consequences for consumers and especially small businesses and startups that don't qualify for traditional security backed personal loans.

Quick facts: In July 2018 ASIC reported Australians owed $45 billion on 21.3 million credit cards. Almost 550,000 credit cards were in arrears with an additional 930,000 in persistent debt and 435,000 account holders only making small repayments. Further 18.5% of consumers were overwhelmed by the amount they owed.

The end of easy money

From January 2019 funders and consumers alike now face new laws about issuing credit cards.

Credit providers are now required to ensure customers can repay their full credit card limit within three years before providing a new credit card contract or increasing the limits on existing credit card contracts.

Up until now, a person usually didn't lose their house due to an unpaid credit card debt; until now

This means many Australians will now be forced to consolidate their large credit card debt before being eligible for a home loan.

The flow-on effects can include:

• equity is stripped from your home when consolidating credit card debt to an existing mortgage
• available funds for deposits are reduced by the increased credit card servicing requirements
• amounts of previously unsecured credit are forced into being held as secured credit, and
• reduced home loan affordability

Many people will be caught unaware of the breadth of the real impact of the end of easy money. If you intend to help your kids with part of a deposit for their home loan, without a plan, your good intentions may be undone by the effect of the new credit card laws.

When does this start?

January 2019 with a full effect felt by about mid-year.

How is this relevant to me or my children?

The rude awakening for many Australians will be credit card debt will prevent many consumers from applying for a mortgage and will need to be consolidated from credit card debts to personal loans that when repaid, will then allow for a mortgage to be applied for.

The devil is in the detail but in summary, this is the new risk to manage;

• When an unsecured debt like a credit card goes unpaid, there is usually no underlying asset that can be seized by the bank
• When this same debt is secured by your home and the debt goes unpaid, the underlying asset can be seized by the bank

Now is not a time to be without your own financial adviser in your corner looking after you and your family.

What to do?

Take a closer look at your credit cards and begin to plan what you need to do in the future with mortgage debts and how to plan for that now.

1. Learn if you qualify for a mortgage in your current position including any credit cards and their limits
2. Decided if you want to convert those to personal loans to pay down and what impact that will have on your serviceability for a future home loan or small business mortgage.
3. Plan how you manage your credit card debt and the level and timeliness of their repayments
4. Protect your ability to continue to earn your income with income protection insurance. 

What's the one thing I need to know today?

If you have a credit card, plan ahead if you're needing finance in the next 12-24 months.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.