Illustration: Karl Hilzinger In fact, as banks try to clean up their tarnished reputations, the report suggests the $50 billion credit card market is another area where banks need to lift their game in how they treat customers, because some people are being sold cards that allow them to rack up unsustainable debts. So, what is the problem with credit card debt? Well, for most people holding the 16 million credit cards in Australia, there probably isn't a huge worry. The $32.6 billion in card debt that is accruing interest is a small fraction of the country's $1.3 trillion in mortgage debt, and paying it off is only a small fraction of total household income. But that's not the case for all households. Treasury says there is a "significant minority" of people for whom credit cards impose a "large burden on their financial and general wellbeing", because they struggle to repay these debts.

It cites a 2010 survey that found 9 per cent of customers struggle to make their minimum repayments, especially lower income-earners. It also points out lower-income households are more likely to pay credit card interest. There will always be some borrowers who struggle to repay loans. However, Treasury points to some distinctive features of the credit card market that make borrowers especially vulnerable to falling into a debt trap. One is the fact that banks don't really compete on their interest rates, which keeps them very high indeed. The average interest rate on credit card debt is a whopping 19.75 per cent, according to the latest Reserve Bank data. Even though interest rates on just about every other form of debt are at record lows, Treasury reports the "spread" banks make on credit cards has increased in recent years, which suggests "limitations" in how competitive this market is. How do banks get away with not really competing on interest rates?

Treasury names a number of "behavioural biases" that it says mean we don't really pay much attention to credit card interest rates. One bias is that many of us are overly optimistic and (in many cases, wrongly) assume we won't pay interest, so we ignore the rate. Another bias is that credit cards are packed with so many complex features: such as interest-free days, loyalty points, or balance transfers, that it can lead to a case of "choice overload". Confronted with the array of choices, many of us probably ignore the interest rate being charged, even if it's sky-high. The point is, these "biases" mean we're not really focused on interest rates when picking a card. The banks know this, and respond by not really competing on interest rates, keeping them excessive. Making matters worse, it is also harder than it should be to cancel a card and switch to a rival. For all the hype about online banking, customers normally need to go to a bank branch or call up a customer service hotline, says Treasury.

As well as excessive interest rates due to weak competition, the other big problem Treasury identified was that too many customers end up with a credit limit that's too high for them. When banks are approving customers for credit cards, it says many only look at a consumer's ability to make the minimum repayments. However, this is a notoriously bad way to pay off this type of loan. Only paying the minimum on a bill of $3,000 or so would end up taking about 17 years, and cost you about $1700 in interest alone. For the banks, however, customers that pay loans off slowly are lucrative indeed. "Consumers with high credit limits who cannot afford to pay much more than the minimum repayment are the most profitable to card issuers," Treasury says. "These incentives could be resulting in many consumers being offered credit limits in excess of their requirements." In other words, Treasury reckons banks are giving excessive credit limits to (highly lucrative) customers who end up paying off debt at a very high interest rate, for years.

That is not a good look for an industry that keeps saying it wants to do the right thing by customers, especially when banks make returns of up to 40 per cent from credit cards, according to previous Treasury estimates. In response, the government is planning changes that would force banks to only give customers credit card limits they are able to pay back over a reasonable period, and to look at whether the cards are suitable for customers. The banking industry hasn't responded to the proposals yet. Whether they support these changes will be a key test of their claims to be putting customers first.