The aim of this Government initiative is to ensure the providers of credit cards do not take advantage of their customers who find it difficult to clear their accumulated balance. As an industry the credit card market is worth £53billion per annum. The practices used by most of the credit card companies have contributed to us earning the unenviable reputation as the “debt capital of Europe”.
Credit cards were never designed to carry a balance for any length of time and with an annual interest rate averaging out at nearly 20% it is obvious why you should not carry a balance on a card. Yet a major industry has been allowed to spring up around this i.e. balance transfers. If anything this proposal has come over a decade too late.
The proposed changes include:
- Higher Minimum Monthly Payment of 5%
Presently most credit card providers take a minimum monthly payment in the region of 2% of the outstanding balance. If you take an average card with an APR of 18% and a minimum payment of 2% it takes well over 16 years to pay off a balance of £2,000 if you only pay the minimum monthly payment.
However, if the credit card companies raise their APR to offset this, we will be no further forward.
- Customers to pay off the most expensive debt first
Credit card providers (with the exception of Nationwide and Saga) choose to pay the least expensive debt off first, an action that is in their favour not the consumers. This is known as “Adverse Scheduling”, so if you take cash out on your credit card which is charged at the higher rate this is the last element of the debt that will be paid back.
- Automatic credit limit increases to be banned
Stop the practice of routinely increasing the available credit to the customer without their prior consent. It is common practice within the credit card industry to increase the borrowing limit of a customer over time as long as they have no late payments or arrears. The credit card company does not assess their current financial situation or their ability to afford the new borrowing.
- Annual Statement of Interest
All other forms of consumer credit must provide an Annual Statement of Interest, at present credit card providers do not have to. This new measure is intended to ensure that every customer is aware of just how much the debt carried as a balance on a credit card is costing them annually.
There has been some concern raised by debt charities and consumer groups about the proposals as they fear that these measures may tip a large number of customers over the edge. This is a real possibility for some but ultimately the issue of credit card balances has to addressed, as carrying a large credit card balance or two is the one thing that will keep you poor.
In an ideal world http://www.thebestbestbuys.com/ would have liked to see at least one other measure put in place:
- Central Register of Credit Cards
A central database would stop people being able to have numerous credit cards and therefore the ability to run up huge balances with different credit card providers. It would also hopefully stop the next generation of credit card customers falling into the same debt cycle that many in Britain face today.
Only time will tell if the proposals that have been outlined will ever become reality. The proposals are a good start but they could have gone just a little further. It will take a very long time to re-educate people not to live beyond their means. Let’s hope it doesn’t take as long as it does to pay off a credit card balance using the minimum monthly payment.
If you want more information regarding credit cards, you can find a “Guide to Credit Cards” on our website, http://www.thebestbestbuys.com/
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