On July 1, 2012 a series of changes for how credit cards operate came into effect. Chances are, you didn’t even know these changes happened.
However, what they mean may have a big impact on your personal debt or how you use your business credit card.
Some of the reforms apply only to new credit cards. Some apply to all new and existing credit cards.
#1: Repayment hierarchy (New credit cards only)
There are often two types of debt that you can incur on your card: normal credit purchases and cash advances.
Previously, when you made a repayment on your credit card debt, the card provider decided which part of your debt that payment was attributed to.
Guess which debt was usually repaid first, at the discretion of the card provider? If you said the one that ensured the card provider made the most money from interest payments, you guessed right. Amazing isn’t it?
The reform ensures that any repayment you make from now will be placed against the portion of your debt where you pay the most amount of interest.
This means you pay less interest on your debt. As a result, the debt will be paid off sooner. Plus, the card provider earns less from the reduction in the interest you owe them.
One reform, lots of benefits for card holders.
#2: Over limit fees (New credit cards only)
Credit card providers made up to one billion dollars from over limit fees last year alone, according to some estimates.
An over limit fee is usually charged any time your purchases exceed the credit limit of your card. The fee used to be charged even if you went over the limit by only a few dollars.
Under the new reforms, over limit fees are banned unless you agree that the card provider can charge them by offering this service. The over limit service works similarly to an overdraft. Without it, your card will be declined if you try to purchase something that will push the amount of debt on your card beyond your agreed credit limit. So, you need to think about whether this service is something that you need, and how much you are willing to pay for it.
#3: Over limit notifications (New credit cards only)
If you exceed your credit limit, it is now mandatory that the card provider alerts you. Then you can choose to make a repayment or continue to use your card. Continuing to use your card may incur fines, as agreed with your card provider based on Reform #2.
#4: Standardised fact sheets (New credit cards only)
Every credit card, regardless of the type of card or the provider, will need to provide a new customer with key information. This information must also be provided in a standard way.
This is designed to decrease confusion over the features of the cards and enable customers to make a more informed choice.
#5: Nominated limit (New credit cards only)
On every new credit card, the customer will be required to nominate the credit limit they wish to receive. This leads us to Reform #6.
#6: No more spruiking for limit increases (New and existing credit cards)
In June, you may have received an SMS from you card provider asking you for permission to send you offers for credit limit increases.
This is because, from July 1, unsolicited requests to increase your credit card limit are banned. You can still ask your card provider for a limit increase, but the provider cannot send you an offer without your permission.
Unsolicited credit limit increases are considered to be one of the factors contributing to the ever-increasing size of our national credit card debt. Previously, many customers automatically accepted the unsolicited offers without considering their ability to make the repayments, or the potential affect on their credit history.
#7: Access to personalised statements (New and existing credit cards)
Statements from utilities companies often include graphs and other information about your usage of the water, electricity or gas.
Credit card statements are now required to provide similar, personalised information. The statements must show how long it will take to pay off the entire balance owing, if only the minimum monthly repayments are made.
This will show the cardholder how long, how much interest, and ultimately, how much the debt will cost them.
With interest charges, those $200 shoes being paid off over several years of minimum repayments will end up costing much, much more.
#8: Interest free periods (New and existing credit cards)
In the past, interest free periods have been used to attract new customers. Sometimes there were terms and conditions that were confusing for customers.
Under the reforms, the card provider has to clearly detail how the interest free period works. This is to allow customers to benefit from these offers, be informed and, ultimately, pay less interest and decrease their debt.
What do you do now?
Check the terms and conditions on your current card and be prepared to move to a new provider if you don’t like what you read.
If you are applying for a new credit card, use the above reforms to make sure that you are getting the best deal possible for your personal situation.
As always, if in doubt, talk to your accountant or financial advisor.
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