I still remember how my cheeks burned as I stood in line at the Commonwealth Bank branch in my home town of Horsham in country Victoria.
“No darling, we’re not giving you a credit card,” the woman at the teller told me in a sing song voice that carried across the breadth of the busy lunchtime queue.
“Your application was knocked back.”
At least half a dozen people standing nearby shifted their weight awkwardly and looked away.
Back then, I was ashamed. Two decades on, I’m relieved. Some dumb luck saw me dodge a financial bullet that could have lodged itself for a decade or more.
Today, 1.9 million Australians are struggling with credit card debts.
“It’s been the number one problem for as long as I’ve been involved in financial counselling, which is 30 years,” Fiona Guthrie said.
Last year, the Australian Securities and Investments Commission (ASIC) released its review of more than 21.4 million credit cards accounts open between July 2012 and June 2017.
The news wasn’t good.
Australians are winding up with credit cards we can’t manage. We’re also being sucked into high interest rate products, when a lower-rate product would save us money.
So, how much are high interest rates actually costing us?
The average Australian credit card balance is $3,258, according to comparison website Finder. Of that amount, about two thirds — $1,986 — is the average amount accruing interest.
And the total amount we owed as of June 2017 was nearly $45 billion, according to the financial regulator’s report.
The report also said consumers would have saved about $621 million in interest in the 2016/17 financial year alone if their balance was on a card with a lower rate.
We’re haemorrhaging extra money on fees too.
ASIC found consumers were charged about $1.5 billion in fees in that same financial year — that includes annual fees, late payment fees and other amounts for credit card use.
None of this would matter if it wasn’t causing so much financial harm.
Ms Guthrie said people often only made the minimum card repayments, which meant debts dragged on for years — even decades.
“Credit cards have been too easy to get, credit card limit increases have been too easy to get, [and] interest rates are really high,” she said.
Over time, banks will build up a customer profile on you. It can take into account things like spending patterns.
If you miss credit card repayments, it could impact your profile or even your credit rating.
That, in turn, can impact whether you qualify for other kinds of loans, including a mortgage.
Banks also look at your credit card limit. Even if you haven’t maxed out a $10,000 limit, it can count against you when you want to borrow again.
I didn’t know anything about all of this when I stood in the Commonwealth Bank years ago, but if I’d been given the money, I probably would have spent it.
Ms Guthrie said some regulatory reforms had improved the situation.
“That has been that banks now have to assess whether you can repay a credit card over a period of three years,” Ms Guthrie said.
That change is significant because previously banks only looked at whether someone applying for a credit card could meet the minimum repayments — which is usually between 2 and 3 per cent of the balance.
“For some people, it could take 50 or 60 years to pay back the credit card at that rate,” Ms Guthrie said.
That might be good news for people still applying for credit cards, but if you’ve already got one — and a sizeable balance — it could be time to reassess the card altogether.
“For the group of people who are paying really high interest rates, they might be better off putting that debt into a cheaper loan and paying it off at a greater rate and trying to clear their debts than just being stuck with the credit card,” Ms Guthrie said.
Plenty of people will tell you they love credit cards and can pay their bills at the end of every month.
That’s great for them, but a lot of people are stuck and experts say it’s no surprise because banks are trying to “catch you and keep you”.
Two of the main paths out of credit card debt are balance transfers or a consolidation loan.
Balance transfers are one way of breaking the cycle. That’s finding another credit card with a lower interest rate, then transferring your debt to pay it off.
To do this well requires discipline and there’s no guarantee it’ll actually help.
When ASIC looked at how people went with balance transfers, it found about a third of people actually increased their debt by 10 per cent or more.
Erin Turner from consumer group Choice said balance transfers came with a lot of traps.
“For example it might be a zero per cent transfer rate. But six months, a year, or a certain way down the track, you can pay some of the highest rates on the credit card market,” she said.
“Also watch out for any fees, charges, anything that happens for expenses you put on a card after you transfer it over.
“What credit card companies are trying to do is catch you and keep you. If you’re struggling, you’re better off getting a personal loan with a lower interest rate or talking to your bank about hardship options.”
Perhaps most importantly, Ms Guthrie said you needed to make sure to cancel your old card if you were transferring a balance.
“You’ve got to make sure you set yourself up to succeed, not set yourself up to fail,” she said.
“So if you’ve found a cheaper product, then transfer it but get rid of the other card, and then pay off as much as you possibly can, within reason.
“Get rid of it, get it out of your life.”
Well, that depends on the interest rate these new types of lenders will offer you — and that depends on your credit score.
When traditional lenders (banks) were exposed during last year’s Banking and Financial Services Royal Commission, an alternative started gain popularity.
Peer-to-peer lending has a few names — P2P and “marketplace lending”.
It’s not a bank, but instead a platform that connects borrowers who need money with investors who are looking for a place to put theirs.
Stuart Stoyan is the chair of Fintech Australia and a member of the Government’s Fintech Advisory Group.
He’s also the founder and chief of MoneyPlace, a rapidly growing marketplace lender.
Mr Stoyan said there was a bump in business after last year’s royal commission.
“Some of that is definitely driven by the fact consumers are more aware they’re getting a bad deal from the banks,” he said.
He said a large part of MoneyPlace’s customer base was trying to eliminate credit card debt with a better interest rate.
“About one in two of our loans is for debt consolidation, and the majority of that is for credit cards,” he said.
“We go from 7.65 per cent through to about 26 per cent, and 85 per cent of our borrowers are on an interest rate of 15 per cent or below.”
Marketplace lenders typically personalise loans and interest rates.
They’re big on technology, so assessing someone’s capacity to repay a loan can happen pretty fast.
It also means someone with a strong credit score could be offered a lower interest rate than someone with a poor rating.
Marketplace lenders must have an Australian financial services (AFS) licence and an Australian credit licence if they’re dealing in consumer loans.
Ms Guthrie said she was concerned lower-income borrowers may end up being targeted by the industry.
“I expect what will happen is the riskier borrowers will end up with peer-to-peer loans, because the banks will be moving to risk-based pricing as well over the next couple of years,” she said.
Ms Turner said the best thing to do was to get independent advice.
Amy Bainbridge, ABC