Have you received a letter in the mail or an e-mail recently offering you the opportunity to increase the limit on your credit card? It may look like the bank being generous or rewarding you for being a good customer but there are other forces at play. From 1 July this year laws will make it much more difficult for lenders to push you into accepting higher credit limits.
 
One major bank – Commonwealth – has already been caught out by the regulator for attempting to push customers to accept higher credit card limits before the new rules take effect. Be wary if you receive a friendly letter offering the gift of a higher credit limit – it may not be in your best interests to accept.
 
What should you do if you receive an offer to raise your credit limit?
 
Before accepting any offer, consider the impacts of a higher credit limit: yes, you will boost your spending power, but you will also face greater financial responsibility and increased repayments if you succumb to the temptation of getting into more debt. 
 
The question you need to ask yourself is: can you afford making the extra repayments?
 
Note how the size of the interest payments below quickly moves into the hundreds and thousands as your debt balance gets larger. If you’re already having trouble paying off your balance, you probably don’t want to raise your limit.
 
If you have a $1,000 debt and a card with an interest rate of 13.49%
Monthly repayments Interest Time taken to pay off debt
$200 $35 6 months
$500 $17 3 months
$1,000 $11 2 months

If you have a $5,000 debt and a card with an interest rate of 13.49%
Monthly repayments Interest Time taken to pay off debt
$200 $904 2 years, 7 months
$500 $334 1 year
$1,000 $176 7 months

 

If you have a $10,000 debt and a card with an interest rate of 13.49%
Monthly repayments Interest Time taken to pay off debt
$200 $4,769 6 years, 3 months
$500 $1,392 2 years
$1,000 $669 1 year

 

 
Another point to note is that whenever you miss a monthly repayment, your credit history can be tarnished, which makes it tougher to successfully apply for loans or a mortgage in the future.
 
[TIP] 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. The higher your limit, the less  likely you are to get the loan.
 
What exactly are the new credit card reforms?
 
The credit card laws to be introduced from July this year will ultimately give you greater control over your 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 you specifically request it. So it looks like the Commonwealth Bank was trying to make one last offer to its credit card customers while it was still legal.
 
"The new law is designed to assist consumers to actively choose how to manage their credit limit, rather than being prompted to increase their limit by unsolicited letters from their bank or credit provider," says ASIC commissioner Peter Kell.
 
-- By Stephanie Hanna

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