In June this year, there was a general announcement that there would be fairly significant reforms to all credit cards. What ensued was an uncertain and garbled series of explanations about what it meant for credit card holders and most of us not in the financial institutions were left scratching our heads. It has only been in the last few weeks that lenders have clarified how this will affect consumers and made this clearer.

In researching this section of the blog, we came across this blog which explains the positive changes in layman’s terms. What is hasn’t explained are the downsides to the reforms. Firstly, credit card companies will be reviewing your finances far more closely. This means that they will only allow you a limit they believe you can pay off in three years. If they don’t believe you can pay off the credit card debt in three years then you will not be getting the requested limit. While this is a good thing as it helps people control debt, if you are in an emergency situation and need the funds, like your whole plumbing needs replacing, then you may not be able to increase your credit card limit quickly.

This is also having an effect on borrowing capacity for loans. Previously, lenders would use 3% per month (36% per annum) of the credit card limit as the repayments amount. So, for a $10,000 limit this means $300 per month. Now most lenders are using 3.8% per month (45.6% per annum) to reflect needing to pay off the balance over a shorter term, meaning a $10,000 limit is now $380 per month. This extra $80 per month is $80 per month ($9,040 per annum) less going towards servicing a loan. This could mean added financial pressure for borrowers planning to take out a loan.