Credit card users struggling under mountain of debt that may never be repaid, ASIC report shows

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One in six consumers is struggling under a mountain of credit card debt that might never be repaid, according to alarming research by the corporate regulator.

The Australian Securities & Investments Commission (ASIC) says 18.5 percent of consumers are overwhelmed by their credit card debt load with outstanding balances now totalling $45 billion.

The study says banks and credit card companies are in the midst of a revenue bonanza with interest being reaped on $31.7 billion of that $45 billion debt figure.

ASIC warns that enticing credit card offers - notably balance transfers from one card to another - are "a debt trap" with 550,000 people in arrears and 930,000 with persistent debt as of June 2017.

A review of 21.4 million credit card accounts opened in the five years to June last year estimates that consumers could have saved $621 million in a single year if they had switched to a more appropriate credit card with fewer frills and a lower interest rate.

The revelations come as financial institutions face daily heat from the banking Royal Commission which has uncovered persistent unethical and in some cases unlawful behaviour.

To counter the growing debt mountain that is lucrative for banks but bad for customers, ASIC is proposing tougher regulations to ensure consumers are only given credit limits that can to repaid within three years.

ASIC deputy chairman Peter Kell says despite rules introduced in 2012, not all credit providers have taken proactive steps to counter persistent revolving debt.

Mr Kell outed four lenders - Citi, Latitude, American Express and Macquarie - for retaining old rules for credit cards opened before June 2012 with 525,000 customers paying more interest than they needed to.

"There are a number of failures by lenders to act in the best interests of consumers," Mr Kell said.

"We expect them to respond swiftly to our finance and we will be following up to ensure the problems we have identified are addressed."

ASIC says while the four credit card providers identified are not breaking the law, they are over-charging longstanding customers and "their conduct is out of step with the rest of the industry."

However in response to a new Banking Code of Conduct, Citi and Macquarie will dump the grandfathered methodology from next year. American Express is also expected to update its policy and Latitude is reviewing its position.

The research also says credit card debt carried by young Australians is "of particular concern".

"Young people were more likely to be in delinquency and multiple card were over-represented," the ASIC study warns.

The ASIC paper cites the findings of a senate inquiry about the dangers of balance transfer cards where consumers transfer some or all of their credit card balance and pay low or no interest over a promotional period.

"In the senate inquiry's view, these transfers can be present a debt trap for consumers .. if they fail to pay off the balance in the promotional period, keep the card the balance was transfered from .. or make new purchases on one of more of the cards," the research says.

ASIC says that over 30 percent of consumers increase their debt by ten percent of more after transferring a balance to a promotional "balance transfer" card.

ASIC says the profit motive by banks and credit card companies means few have taken proactive steps to protect the interests of their customers finding that:

* nine of the 12 providers do not proactively contact consumers that make payments at or near the minimum amount to repay more of their outstanding balance

* eight of the 12 providers do not look for signs of potential consumer harm other than training frontline staff to look for signs of financial difficulty

"Consumers who are in persistent debt, or repeatedly making low repayments, are profitable for credit providers," the research says.

"However, providers have obligations to conduct themselves efficiently, honestly and fairly."

ASIC has released a consultation paper to tighten rules on credit card lending to prevent consumers from being signed up to unsuitable credit card contracts.

The proposal - which is likely to be opposed by credit card providers - is scheduled to come into effect from January 1 next year.