What credit card reforms will mean for your cashflow

The laws around how credit cards work have changed. Recent amendments to the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011 took effect on 1 July and are welcome news for small business owners who are struggling to keep on top of their credit card debt.

There’s a series of changes that come into play, some of which will be applied retrospectively to all existing credit card accounts, while others will only apply to credit card contracts that are approved after 1 July.

The changes that apply to all credit cards – the banning of unsolicited credit-limit increase offers and credit card statements will show how long it takes to repay the card’s outstanding balance only making the minimum repayment – are welcome news. But it’s the credit card reforms that apply to new credit cards that are going to have the biggest impact for small business owners.

Changes will be seen on credit card statements, they will show how long it takes to repay a balance making the minimum repayment. People applying for a credit card will have standardised information about a lender’s credit card products to make sure they have compared all their options. Over-limit fees will be banned unless you agree to receiving them and the most expensive credit card debt will be paid off first.

The following information should be of assistance in helping you decide whether applying for a new card to take advantage of the reforms is going to be in your business’s best interests.

Changes to the allocation of credit card repayments

You may or may not be aware that when you pay off your credit card debts, the bank currently applies your repayments to the charges that attract the lowest levels of interest, like balance transfers and purchases made under a promotional rate.

While the banks are directing your money to the charges that earn them less money, the transactions that have a higher level of interest like cash advances are left to accrue interest for a longer period, and this ends up costing the cardholder more. Changes to the allocation of payments means this order has been reversed and repayments are directed to the charges with a high rate of interest first.

Directing card payments to higher interest charges first on a ‘Citibusiness’ Business Credit Card with a balance of $1,000 charged at the cash advance rate and $1,000 charged at the purchase rate of interest, comes to a saving of $265.87 [On a cash advance rate of 21.49 percent, a purchase rate of 20.74 percent and without an annual fee factored in] and half a year off the time it takes to pay off the card.

This change will only be felt by cardholders who use their card for a variety of transactions. For instance, some BPAY payments may be charged at the cash advance rate while others are charged at the purchase rate of interest. For cardholders who only make purchases or just have one type of transaction on their card, there’s likely to be little change.

Read the Credit Card Finder credit card reforms guide for more information on how they impact you.

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