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
Posts Tagged ‘Consumers’
UK Consumer Finance – Do Proposed Measures to Protect Credit Card Users Go Far Enough?
February 3rd, 2010How Are Finance Charges Calculated?
December 30th, 2009
Whether you are shopping for a new credit card or wondering about the one that you may already have, knowing how to calculate the finance charge applied to that card is important. First, however, it is equally important to know what finance charges really are.
A credit card finance charge is the amount of money that you pay to the credit card company in order to use their credit. This is not the same as the purchase amount balance. The purchase amount balance is the dollar amount of the purchases that you made using the card. If you pay off the purchase amount balance within the stated amount of time that the company allows, you will have no finance charges applied to the amount. It is when you carry over your balance that finance charges are triggered and added to your account.
Finance charges are calculated using the amount of your outstanding balance and APR. The APR is the Annual Percentage Rate and all credit cards use them to figure finance charges. It is important for consumers to understand that the ARP can vary from one company to the next, and it can even vary within the same company. It is for this reason that consumers should always look for the companies with the lowest APR’s. This will save you money in the long run.
There are several ways that credit card companies can calculate the finance charges that they apply to consumer credit. Many people do not realize it but the method that is used can make a difference in the amount of money that you will have to pay. Here are some of the methods that credit card companies use to figure finance charges on your outstanding balance:
They can calculate using one billing cycle or two billing cycles.
They can use the adjusted balance, previous balance, or the average daily balance.
They can exclude or include new purchases in the balance.
You will normally find that you have a lower finance charge when the company uses what is known as one-cycle billing and uses the average daily balance method which excludes new purchases. Much of this, however, depends on the balance and the time of the month that you make purchases and payments.
The next lower finance charge method is the adjusted balance, followed by the previous balance method. You can see which method the company is using by reading the bill that you receive. This information is usually contained on the back side.
It is also important that you understand that some companies will have a minimum finance charge system. When a credit card company uses this system you will be charged that set amount even if your calculated finance charge is less than that amount.
Of particular importance to some credit card holders are the cash advance programs that come with some cards. Consumers should be very careful when using credit cards for cash advances. Many companies that offer cash advances treat those advances differently than they do purchases. Before you use your credit card for a cash advance, make sure you look for the details of how you will be charged for that advance.
You will certainly want to know what the APR is for cash advances. Keep in mind that this may be significantly higher than the APR that is used for purchases. You should also investigate the fees that may be applied to the transaction. Fees are in addition to the finance charge that you will have to pay.
Lastly, find out how your payments will be credited. Some companies will apply your payments to your purchases first and then to any advances in cash that you have taken.
Use your credit card wisely and keep track of your finance charges and you will enjoy your credit more fully and avoid some of the pitfalls that many consumers experience.
By: Peter Kenny
Finding The Right Credit Card Online
December 30th, 2009
These days, more than ever, it is important for consumers to shop around for the right credit card before making applications. This is for a number of reasons. Firstly, you need to ensure that you have the right card for your needs in terms of matching your spending and repayment habits. Also, with current lending conditions tighter than ever due to the effects of the global credit crunch, you also need to make sure that you opt for a card for which you are eligible.
There are many different credit cards on the market these days, and a wide range of providers that offer these cards. In the past trying to find the right credit card often meant ringing around all of these providers in order to check what was on offer, whether you were eligible, and what the cost of taking out credit would be. These days, much to the relief of most borrowers, finding the most suitable credit card is far easier and faster.
The Internet has proven invaluable to those looking for low cost finances, as it allows you to quickly and easily see which credit cards are on the market, and which are likely to suit your needs and your pocket. You can browse and compare credit cards at a glance when you use the Internet, and you can do this from the privacy and comfort of your own home, and at any time of the day or night, so there are no restrictions in place with regards to when you can do your card hunting.
Also, once you have found the most suitable card you can make your application online too, and in many cases you will receive an instant decision in principle online, which means that you won’t be kept waiting on tenterhooks to find out whether you have got the finance that you need. Using the Internet can make finding the right card a far faster and easier process, and can increase your chances of finding a suitable card that will not cost over the odds.
When you use the Internet to find your credit card you should remember to check things such as the rate of interest charged, details about any rewards or benefits, and the terms and conditions attached to the card, as well as other relevant details, such as the interest free periods offered on 0% credit cards.
By: R. Charlton