Over the past week, there have been reports both in the US and the UK of credit card providers closing cardholders’ accounts and lowering credit limits, seemingly without notice. In the US, a survey showed that almost 50 million Americans had their credit limits cut or their card accounts closed in the past 30 days.
Meanwhile, in the UK, the issue seems to centre around card provider Virgin Money. The Guardian newspaper reported that 32,000 Virgin Money credit cardholders were notified on Tuesday that their accounts were blocked with immediate effect, and that they would not be able to make further purchases.
According to Virgin Money, the move was part of routine “affordability checks carried out by a responsible lender”. However, it seems to have taken cardholders by surprise, with many claiming to have good payment histories, having given the lender no reason to freeze their account.
Following six weeks of lockdown and a downturn in many households’ finances, this move by card providers is happening at an incredibly difficult time. Both in the UK and the US – as in Australia – people are relying on their credit cards to see them through. Perhaps waiting for government assistance, or simply for work to start back up and income to return to normal, cardholders are using their cards to cover the essentials, such as food and bills.
But, just as cardholders are doing all they can to survive, so it seems, are card providers. While Virgin Money in particular recently reported a £7 million ($13.3 million) loss, card providers the world over will likely see a steep downturn in profits as millions of cardholders continue to use their cards with no way to pay back their spending.
Here in Australia, analysis suggests defaults on credit cards and personal loans could rise to five times normal levels, with the big four banks expecting a decrease of 46% on pre-crisis profits. So, could we start seeing notifications of our credit card accounts being closed and our credit limits lowered here too?
Could It Happen Here?
Over in the US, lenders apparently aren’t required to tell cardholders when their credit limits are lowered. In Australia, it seems to depend on the card provider in question.
According to Westpac’s Combined Conditions of Use and Credit Guide, if the bank chooses to lower a cardholder’s credit limit or stop further transactions from being made, it will send the cardholder a notification “as soon as reasonably possible (which may be before or after the change is made)”.
If the bank believes the change is unfavourable to the cardholder, it will provide that notification at least 30 days before the change takes effect. However, it may choose to make those changes without prior notice if the cardholder is in default, if the card account has been inactive for six months, or if the bank believes that, as it states in its small print: “the use of your credit card may cause loss to you or us”.
Over at ANZ, its Credit Cards Conditions Of Use states that the bank may reduce cardholders’ credit limits “at any time”, with notice provided to the cardholder “as soon as practicable”. Examples of when ANZ might do this are similar to those of Westpac, such as when the cardholder is in default, when the account is inactive, or when the bank “believes the size of the existing credit limit will cause loss to you or ANZ”.
And smaller providers? While we obviously can’t look at each and every card provider, as an example of a smaller provider, in its credit card terms and conditions, me Bank states it may reduce, suspend or cancel cardholders’ credit limits “at any time without prior notice”. The bank says it provides notification “as soon as practicable” after making these changes.
So, it seems card providers are within their rights to lower cardholder credit limits and put a stop to further transactions being made, as long as they include it in their terms and conditions. But, is that happening here as it seems to be happening in the US and UK? Well, the fact that it hasn’t made headlines here suggests not. However, that doesn’t mean cardholders here aren’t affected.
According to Roland Bleyer, founder of CreditCard.com.au, he has received reports from American Express business credit cardholders that they have indeed had their credit limits lowered, most without being provided notice. As business cardholders often rely on their cards to effectively manage their cashflow, this move by AmEx has the potential to put those businesses in an awkward – and perhaps in some cases, precarious – position.
It remains to be seen whether personal credit cardholders will be affected in the same way here. What is certain, however, is that more trouble is on its way.
Cardholders in Trouble
According to new data provided by the Australian Bureau of Statistics, almost one million Australians have lost their jobs since social distancing measures were introduced in March. On Tuesday, Prime Minister Scott Morrison confirmed this figure, saying that about a million Australians were on the JobSeeker payment, while more than 5 million were receiving JobKeeper to stay in employment.
According to Andrew Fleming, CEO of financial stress-busting app Financial Mindfulness, the fact that so many Australians are now experiencing rapidly falling incomes, while simultaneously being encouraged to make card payments over cash, is creating a “perfect storm” that will leave many in deep financial ruin.
“There is almost one credit card for every adult Australian. In January 2020 just before the crisis, there was $42.6 billion owing on credit cards with $28.4 billion accruing interest,” explained Fleming in a 9news interview (1). “This situation, with lower incomes and increased use of cards, is a perfect storm for millions of Australians to deepen the financial holes they were already in.”
Over in the US, a similar story is playing out. With 33 million Americans now unemployed, it’s perhaps no surprise that 47% of US adults (about 120 million people) currently have credit card debt, up from 43% in early March. Along with these telling figures, the recently released survey revealed that 23% of credit card debtors (about 28 million) have added to their credit card debt as a direct result of the COVID-19 outbreak (2).
Also highlighted within the survey was the fact that millennial credit cardholders have been hit the hardest, with one in three going further into debt because of the crisis. Unsurprisingly, 45% of credit card debtors say they are stressed about their credit card debt. Troublingly though, 13% say they are either paying off nothing at all towards their debt, or have no plan for doing so.
Well then, what’s the solution? While there will be no quick fix that will get cardholders out of debt, many card providers – both in Australia and elsewhere – are now offering a temporary reprieve on repayments to cardholders experiencing financially difficulty as a result of coronavirus. But are these repayment ‘holidays’ really a good idea?
Repayment Holidays 101
So, what are these repayment holidays – and how do they work? Offered to cardholders in financial distress due to coronavirus, repayment holidays allow cardholders to defer their repayments over a set period of time, usually over three to six months. This gives them time – in theory, at least – to get back on their feet, as they put their money towards the essentials rather than their credit card repayments.
As an arrangement set up between the card provider and cardholder, a repayment holiday can also work to protect the cardholder’s credit score. Typically, missed repayments are reported to the credit reporting agencies to record on cardholders’ credit reports. These black marks remain there for years, making it harder – and in some cases, more expensive – to get approved for credit in the future.
However, with a repayment holiday in place, there are no missed payments – and no resulting negative credit reporting. In addition to that, cardholders can also escape hefty late fees that many card providers charge on late payments.
Sounds good, right? While repayment holidays can certainly work well for those in financial distress, not all card providers deal with them in the same way. For example, some card providers ‘pause’ interest along with repayments, while others continue to allow interest to accrue. In those cases, cardholders potentially end up with a bigger balance – and a much bigger problem to deal with – after their ‘holiday’ is over.
With that in mind, let’s take a look at how each of the card providers offering repayment holidays is currently dealing with the issue.
More than 40,000 of Westpac’s credit card customers have sought support with managing their finances this year, according to the bank’s consumer division boss David Lindberg. So, to help those who have lost their job or suffered loss of income as a result of COVID-19, Westpac has created a three month credit card support package.
Taking up this package means cardholders do not have to make any repayments over a period of three months (or three statement cycles). In terms of interest, no interest will accrue on new card purchases or cash advances, or on any existing balance on the card. And as long as cardholders have not reached their credit limit or are in arrears, they can continue to use their card.
As a smaller provider, Australian Unity does not provide quite as much info on its repayment holiday option. According to the mutual’s website, it offers “the ability to pause repayments on loans, including credit cards, for up to six months (which may include interest capitalisation)”, depending on cardholder circumstance.
Interest capitalisation, you say? Essentially, with interest capitalisation interest continues to accrue while payments are deferred, but we’ll cover that in more detail shortly.
According to Bank First, any home loan, personal loan or credit card customer who requests financial assistance may be able to defer their repayments for up to three months, with interest capitalised to the loan.
Bank of Heritage Isle
Members of the Bank of Heritage Isle who are financially impacted by COVID-19 have the option to defer repayments on all lending products, including home loans, personal loans, overdrafts and credit cards, for up to six months. Keeping it short and to the point, the bank provides no other info on how this would work for members on its website.
According to Greater Bank, it is waiving interest and allowing the deferral of repayments on all existing credit cards for six months from 1 April 2020.
For HSBC cardholders whose financial situation has changed as a result of COVID-19, they may apply to defer their credit card repayments for up to six months, with a review after the first three months. HSBC provides examples of where a cardholder may be eligible to apply, including being stood down at work, being unemployed, or having a reduced household income.
ING is offering cardholders experiencing financial difficulty the opportunity to pause their repayments for three months, with the potential to extend to a total of six months. During this period, repayments are not required, but cardholders can make payments towards their balance if they choose.
According to ING, for cardholders who opt for this repayment ‘pause’, interest and fees will continue to accrue on their balance. That means, and at the end of the payment pause period, their total balance will be higher than it was before the payment pause. This balance is then converted to an instalment plan, attracting a variable rate of 9.99% p.a.
It’s important to note that during the payment pause and instalment plan periods, ING cardholders are not able to use their card, as all credit cards linked to the account will be inactive.
Both personal and business banking customers of Macquarie have the option to immediately defer their loan repayments for six months if they are experiencing financial difficulty. This applies to those holding small and medium business loans, overdrafts, home loans, car loans and credit cards. Macquarie will check in at three months to see if circumstances have changed.
Newcastle Permanent customers experiencing financial hardship can access the provider’s MemberAssist program. This allows credit card and personal loan customers who are impacted by COVID-19 to request a pause in their repayments for up to six months, with a three month check-in. The provider notes interest is capitalised for personal loans.
Another bank keeping it short and sweet, Police Bank states it will help members impacted by COVID-19, providing the option to defer repayments on all lending products, including home loans, personal loans, overdrafts and credit cards for up to six months. No other info is provided.
As you can see, there is no one-size-fits-all approach to repayment holidays. For that reason, cardholders who are thinking of applying for a repayment holiday on their card payments should talk to their provider in detail to make sure they fully understand what will happen over that ‘holiday’ period – and after it ends.
Repayment Holidays And Your Credit Report
When you’re worried about how you’re going to put food on the table, the last thing you will likely be thinking about is your credit report. But, while this situation is temporary – hopefully, anyway – your credit report is not. If you miss repayments on your credit card without talking to your provider first, it will be recorded on your credit report, causing untold hassle later on down the line.
Which is why talking to your card provider is so important. If you are struggling financially, and think you won’t be able to make your minimum repayment, you should talk to your provider to work out the best course of action for you. This may involve taking a repayment holiday, or it may see you taking another path. What’s important is that your card provider knows what’s going on, so that you can avoid it impacting your credit score.
When repayment holidays – or pauses, as they are sometimes referred to – were introduced on a wider scale as a result of COVID-19 back in March, Australian Banking Association CEO Anna Bligh made a point of outlining how they would affect users’ credit reports within this industry-wide agreement.
According to the agreement, credit providers will not report missing payments to the credit reporting agencies during a repayment pause. If a cardholder happens to be behind in repayments before being granted a deferral, the provider shall determine how to report those missed repayments once the deferral period had ended, but during the pause, will not file a report.
In a statement, Bligh said, “There may be other factors which can affect a customer’s credit rating, but customers accepting a COVID-19 loan repayment deferral can rest easy that the deferral will not be one of them”.
After The Holiday Ends
Knowing what happens after a repayment holiday ends is vital. Whether your financial situation has improved or not, you need to know what will be expected of you once that repayment pause is lifted – and whether you will be in a better or worse position because of it.
At the end of the three month repayment holiday, Westpac cardholders’ repayments will return to normal, and interest will be charged as before. With a pause on interest as well as repayments, cardholders’ balances may be higher due to continued spending over that period, but continued accrued interest should not be a factor.
Westpac urges cardholders who still need assistance after the three month support period to get in touch with the bank.
While we assume repayments would return to normal after the repayment holiday, Australian Unity does not provide this info on its site. It does, however, say this:
“Due to the deferral and/or capitalisation of interest, it should be noted that there will be additional interest charged over the life of the loan. In addition, a temporary limit increase on credit cards may incur interest if it is not repaid within the usual time limits provided for under the standard terms and conditions.”
Lumping credit cards in with loans, Bank First offers this info on repayment holidays for its credit card customers:
“For the deferral period no repayments are required. However, during this time, interest will add to the loan balance and your loan balance will progressively increase. Your loan term will be extended so your repayments do not increase as a result of the deferral period but may increase for other reasons such as a change in interest rate or accessing redraw.”
Bank of Heritage Isle
Again, limited information is provided by the Bank of Heritage Isle regarding what happens during the repayment holiday with regards to interest, as well as what happens after.
Greater Bank states it will waive interest during its payment holiday. That means, unless cardholders continue to spend on their card during the pause period, the balance should be the same afterwards as it was before the pause period began.
At HSBC, cardholders who are approved for the repayment holiday will see no interest applied over their deferral period. After the deferral period is over, cardholders will be expected to make at least their minimum monthly repayments, with interest accruing as normal.
During ING’s repayment holiday, cardholders’ balances continue to accrue interest and fees. That means, even though spending on the account is frozen, the balance will continue to grow. At the end of the payment pause period, the balance is converted to an instalment plan attracting a variable rate of 9.99% p.a., which the cardholder pays off in accordance with the terms agreed.
Once the balance has been paid in full or instalments have been paid on time for six months, cardholders may contact ING to request reactivation of their card. This request will be subject to a new assessment and may result in a reduction to the credit limit on the card.
While it does provide FAQS on how its payment pause program affects home loan customers, Macquarie doesn’t actually provide specific information on how it affects credit cards. While we assume repayments would return to normal, the only info regarding interest is as follows:
“Interest will continue to be calculated and charged to your loan over this period. At the end of the payment pause your repayment amount will be recalculated to adjust for the missed payments and to ensure that your loan can be repaid over the remaining loan term.”
Newcastle Permanent provides no specific information detailing what happens after a repayment holiday, or whether interest continues to accrue during the pause period.
Similarly, Police Bank provides no specific information detailing what happens after a repayment holiday, or whether interest continues to accrue during the pause period.
We assume, where minimal information is provided online, card providers would be able to offer cardholders full details of what is involved either verbally, or in writing. If you can’t find the info you need online, be sure to call your provider to find out what happens during the pause period, what happens after, and what it will mean for you financially if you choose to apply.
What Is Interest Capitalisation?
Capitalisation is the addition of unpaid interest to the principal balance of a loan. So, during a period when repayments are deferred, interest continues to accrue, and is added to the total balance owing on the loan. And as you continue to pay interest on that total balance, you are essentially paying interest on interest.
With interest capitalisation, as the total balance is higher at the end of the deferral period, the total amount of time to repay the loan may be longer, which could make it more costly over time. Alternatively, the provider may choose to adjust repayments so that the loan will still be paid off within the original term, which would result in the borrower paying more on each repayment than originally agreed to.
Repayment Holiday: Pros & Cons
Whether a repayment holiday is right for you will really depend on your situation. It will depend on the terms your card provider is offering, and how dire your financial situation is. With that in mind though, we can still offer some pros and cons.
- Not having to pay your minimum repayment each month could take the pressure off, so you can concentrate your income on the essentials.
- If you are unable to make your minimum repayment, you won’t have to worry about it affecting your credit score.
- You won’t be charged late fees for missing a repayment.
- You may be able to make payments towards your balance, helping to reduce what you owe even without a regular repayment schedule in place.
- If you are with ING, you will start a repayment plan at the end of the pause period, allowing you to get on top of your debt, while paying less in interest.
- Depending on your provider, your balance may continue to accrue interest and fees.
- You may not be able to use your card over the pause period.
- Not making repayments could entice you to spend more, as you are no longer thinking about what you have to pay off.
- You may not be in any better position financially after the pause period ends, meaning you are back where you started, with potentially more owing on your card.
Alternatives to taking a repayment holiday
So, are there any alternatives to taking a repayment holiday? Again, this will depend on your card provider, so it’s a good idea to discuss your situation with them first before doing anything else. Here is a run-down of what’s on offer with some of the main card providers in Australia:
The Big Banks:
- CommBank is refunding late fees and interest for the month of March.
- NAB is lowering minimum monthly repayments and waiving its late payment fee for at least three months.
- Westpac is offering a three month pause on repayments and interest.
- ANZ is advising customers to transfer to a product with a lower rate, or reduce their credit limit.
Other Credit Card Providers:
- Australian Unity is offering a pause on repayments for up to six months.
- Bank First is offering deferred repayments for up to three months.
- Bank of Heritage Isle is offering deferred repayments for up to six months.
- CUA is offering repayment relief (dependant on situation), and no fees for replacement cards.
- Greater Bank is offering deferred repayments for up to six months and waived interest.
- HSBC is offering deferred repayments for up to six months.
- ING is offering a payment pause for three to six months.
- Latitude Financial is offering reduced monthly repayments and interest.
- Macquarie Bank is offering deferred repayments for up to six months.
- Newcastle Permanent is offering deferred repayments for up to six months.
- Police Bank is offering deferred repayments for up to six months.
- Unity Bank is offering repayment relief (dependant on situation).
If you decide a repayment holiday is not right for you, you could look at switching to a low rate card or a balance transfer card. These options could allow you to pay down your debt faster, while paying less in interest. It is, however, worth considering your financial situation and how it may affect your eligibility when you apply.
Seeking the advice of a financial counsellor may also be a wise course of action. If you need independent help, try the National Debt Hotline on 1800 007 007. You can also check out the following resources.
- You can find useful information about financial difficulty from the ABA here.
- You can find out more about financial counselling from the peak body of financial counsellors in Australia, Financial Counselling Australia (FCA) here.
- To access information that will help you get your finances back on track, visit the National Debt Helpline for self-help tools, fact sheets, letter templates and more.
- To check out in-depth information that will help you make smarter choices about your finances, visit MoneySmart.
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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