Finally we are seeing some action from the Government to combat the massive credit card debt here in the UK. There has been an announcement this week by the British Government, outlining a number of areas they wish to see changed in the way that credit card providers operate.

The main aim of the initiative is to ensure the providers of these products are unable to take advantage of customers who carry balances on their cards. The credit card industry is estimated to be worth £53billion per annum in the UK.

As a financial product, 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 hard to understand why consumers would carry a balance over the longer term as it is amongst the most expensive ways to borrow money. Now that a major industry has sprung up around this i.e. balance transfers, the Government’s proposed changes are long overdue.

In recent years we have seen some tactics used by the credit card industry that have helped Britain earn its rather sad but wholly accurate reputation as the “debt capital of Europe”. That said, £2billion has been paid off in the last 12 months. We have seen an overall reduction in credit card debt, decreasing from £66billion to £64billion.

One view is that people have changed their spending habits in light of the current economic climate. The other view is that credit card providers are no longer approving the same number of new customers and are imposing tighter management because they no longer have a bottomless pit of money to lend. The truth probably lies somewhere between the two views, either way balances are reducing.

The Government’s proposed changes include:

• Higher Minimum Payment

This addresses the fact that, the minimum monthly payment is mainly used to pay interest and not the outstanding debt. At present most credit card providers take a minimum payment in and around 2%. It can therefore take well over 16 years to pay off a balance of £2,000 if you only pay the minimum monthly payment.

• Customers to pay off the most expensive debt first

Providers choose to pay the least expensive debt off first, an action that is in their favour not the consumers. This is known as “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 increases to credit limits 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.

• An Annual Statement of Interest

Unlike all other forms of consumer credit, credit card providers do not have to provide its customers with any form of Annual Statement of Interest. 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.

I suppose the big question is do the proposed changes go far enough?

Ideally I would have liked to have seen at least one other measure put in place:

• Central Register of Credit Cards

This would stop people being able to have numerous cards and run up huge balances with different credit card providers. It is not uncommon to come across people who have as many as eight credit cards.

The proposals are a good start but they should have gone further. Only time will tell if the proposals that have been outlined will ever become reality. It will take a very long time to re-educate consumers 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.

By: Malcolm Murphy