Consumer credit reform and behavioural economics: Regulating Australia's credit card industry

Australian credit card debt has grown rapidly over the last two decades and there were, as at September 2011, 14.9 million credit card accounts in Australia with outstanding balances of $49.2 billion, representing an ownership rate of 87% of the adult population. Credit cards are the second largest type of household credit product provided by Australian banks, after household mortgages. This research note examines the recent reforms enacted under the National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Act 2011. The reforms include (1) a requirement for key fact sheets (containing information about costs, fees and repayments) for all new credit card contracts; (2) a requirement for credit card providers to “make reasonable inquiries about the maximum credit limit that a consumer requires”, to notify consumers when they have exceeded their credit limit, and to provide warnings about the consequences of minimum repayments; and (3) a ban on credit card providers issuing written credit limit increase invitations except where a consumer has consented. The research note links the reforms to behavioural economics by identifying how the reforms address two key consumer biases – optimism and imperfect self-control, and examines how the reforms seek to alter the behaviour of consumers vulnerable to financial hardship.