Credit card crackdown
The government has announced some new proposals to ensure that, in the future, credit cards and store cards give people a fairer deal.
These types of debt are often expensive and can lead to financial misery when circumstances change and repayments cannot be met. Because of the relative ease of racking up credit card debt, it can be easy to go from zero to massive debts in a relatively short space of time.
The credit crunch has already put pressure on some credit card providers, with credit limits being cut and cards withdrawn entirely in some cases. But some of the worst credit card practices remain in place. The proposals today should make life better for those who have and use credit cards.
Here is what is being proposed and how it could change your relationship with credit cards in the future.
1 – Most expensive debts paid off first
As things stand, when you accumulate debt on a credit card, the cheapest debt is repaid before the more expensive debt. This means that your monthly repayments get allocated to things like cheap balance transfers and new purchases rather than expensive cash withdrawals.
The proposals aim to reverse this situation. Under the new rules, credit card companies could have to apply your repayments to the most expensive debts on your card first before paying off cheaper debts. This would result in reduced total interest charges and a faster repayment of debts.
2 – No more automatic credit limit increases
When credit card companies want to encourage their customers to take on more debt, they can simply increase the credit limit. You get a nice friendly letter telling you that you can go to the shops to spend more money. The credit card company is able to charge you more interest on the debts you accumulate.
The new rules could stop these automatic credit limit increases. This would mean you would need to ask your credit card company to increase your credit limit. Doing this means you have probably given some thought to the affordability issues related to having higher debts.
3 – Higher minimum monthly repayments
When you only make the minimum repayments on your credit card each month (usually 2-3% of the balance) it takes much longer to repay your debts and the total interest charges can be significantly higher.
This is a widespread problem. The Government says that around one-third of people only make the minimum repayments each month. This can mean it takes decades to pay off their debts.
By increasing the size of minimum monthly repayments, the government hopes that people will be able to clear their debts much sooner. It might also make people think twice before taking on debt which will cost more to repay.
4 – Easier to understand terms and conditions
Credit card agreements can be complicated and, due to their length, many people simply sign up for a credit card without really understanding the small print.
Understanding the terms and conditions of any financial product is essential to ensure it meets your needs and you know what might happen in the future.
5 – No changes to existing interest rates
The current system means that credit card companies can increase interest rates on existing debts without proper explanation. This can sometimes happen when the credit card provider thinks you are not going to be able to meet your repayments in the future, because your circumstances have changed.
About a year ago new rules quickly came into force to ensure borrowers could freeze their interest rates if new higher rates were proposed, but this would also stop them from borrowing more. The consultation suggests several options, including stopping firms from increasing interest rates on existing debts or forcing them to show rate rises were to cover increases in costs.
The future?
These proposals might not deal with all of the issues associated with credit cards, but they should change our relationship with the credit card firms and ensure we are in greater control of the debts we take on. What is also needed is a cultural change where consumption funded by credit card debt is seen as the exception rather than the norm.
Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice. You can follow him on Twitter @martinbamford or follow BrilliantWithMoney @brilliantmoney.
