A friendly letter arrives from your Credit card
provider, kindly offering you a higher credit limit. Isn’t that so generous? Not really.
Australia’s credit laws are due to change in July, making it much more difficult to lenders to increase your credit limit. Meanwhile, many customers are being asked if they want higher credit limits. It sounds tempting but can you really afford that higher limit?
The credit card reforms to be introduced from July will ultimately give customers greater control over their credit limits:
• You can nominate a spending limit that needs to be approved by the card provider, on all new credit cards
• Fees can no longer be charged for going over the limit, unless you agree to such fees beforehand
• If you go over the limit, you can choose to either continue using the card or make repayments instead of paying expensive “over limit” fees
• Credit card providers must use your repayments to eliminate the most expensive part of your debt first
• There will be standardised fact sheets about each credit card, making it easier to compare products
• Credit card providers must also explain the concept of interest-free periods and specify how long it would take you to pay off your entire debt if you were to make the minimum repayments
Another key reform is that banks can no longer offer to raise your credit card limit unless the customer specifically requests it.
However, consumer groups have warned that credit card providers have amped up their advertisements and offers for higher limits while they still can, before the new laws kick in.
Before accepting any offer, consider whether you’re able to repay the debt.
Under a higher credit limit, everything goes up: your spending power, your level of repayments, your financial responsibility and the possibility of winding up in debt. Defaulting on your credit payments will damage your credit history, making it difficult to receive future loans.
Thinking of applying for a home loan? When assessing your ability to repay a mortgage, lenders will look at your credit card limit rather than how much money you currently owe on your credit card. An applicant with a high limit is unlikely to be successful in receiving a loan, as the lender believes they have already hit their maximum level of borrowing.
In short: there’s no need to raise your limit, unless you need to access more funds.
-- By Stephanie Hanna
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