The Financial Services Royal Commission has heard of the “heartbreaking” effects of unscrupulous lending on the lives of lower-income Australians, in an opening hearing that put consumer interests at the centre of investigations.

Karen Cox, of consumer aid organisation the Financial Rights Legal Centre, claimed the banks’ failure to lend responsibly could result in severe psychological strains leading to mental and physical illnesses – and even suicide.

After an opening statement by council assisting Rowena Orr, which summarised the banks’ own voluntary disclosures of what they regarded as instances of their own misconduct, Ms Cox was called to the witness stand to give evidence on consumer lending.

She told Commissioner Kenneth Hayne credit card debt was by far the most “insidious” form of debt.

“It’s quite frightening how much credit card debt is out there, and how many lives are affected by it,” Ms Cox said.

“The credit card market is where we see the most insidious effects, because it is such a long-term drain on people’s finances. The credit card may initially allow people to consume consumer goods, but in the long run it has precisely the opposite effect.

People end up with all their money going towards interest fees. They have very little left to go towards essential living expenses. Savings are out of the question.

“Resilience to meet expenses in the future becomes more difficult because of the debt that they’re carrying.”

It was common for people to transfer their credit card debt to their mortgage, a move that made sense in theory since the interest rates are much lower on mortgages, Ms Cox said.

However, she said many people then went on to rack up more debt on their credit card, and then transfer that to their mortgage as well. She cited one person who had transferred a total of $100,000 of credit card debt to his mortgage. As a result, his family looked likely to lose their home.

“People who are in long-term unsustainable debt experience stress. That stress then causes them to have physical ailments – to get sick,” he said.

“It causes strain on relationships, it causes family breakdown, it causes loss of productivity, it actually causes people to have deteriorating ability to make complex decisions. Their thinking capacity is literally absorbed by dealing with the day-to-day stress of debt.”

Credit card debt is insidious, the Royal Commission heard. Photo: Getty

Last year around 25,000 people called the Financial Rights Legal Centre’s helpline, 17,500 of which had problems relating to debt, Ms Cox said.

Alongside credit cards, she gave evidence on home loans, car loans and insurance add-ons.

She said there were “endemic” problems in the car loan industry. A particular problem was customers being “upsold” add-ons – so someone might buy a car for $5000, but be persuaded to buy add-ons for an additional $5000, thanks to what Ms Cox called “aggressive” sales tactics.

A recurring problem across all forms of lending was lenders’ failure to accurately assess borrowers’ expenditure, she said.

“The impression we get from talking to people … is that it looks likely that a benchmark has been used, rather than individual facts.”

Representatives from NAB, Commonwealth Bank, Westpac, ANZ and Citibank will give evidence over the next two weeks. At time of publishing a NAB representative was giving evidence on misconduct in the bank’s “introducer” program.