New credit card rules could lead to backlash
New government rules surrounding credit cards are being brought in this month, impacting on around 30 million cardholders.
These new rules are not something thought up by the credit card providers in order to level the playing field in the credit card industry; they come instead from a government consultation exercise last year which found that credit card holders needed to be treated more fairly.
The card providers knew the rules were coming and that unless they accepted them as a voluntary code, they would be faced with new and possible punitive legislation.
Watch our Moneywise TV episode: How to choose a credit card
So what are the key changes?
• Cardholders' repayments will be used to reduce their most expensive debt first
• Those opening new accounts will have a minimum repayment level set that covers all interest, fees and charges during the month, as well as 1% of the outstanding balance
• Card holders are to be given greater control over their credit limits
• Consumers will have the choice to remain on the existing interest rate in place before any rate hike
• Card providers are to work more closely with debt advice agencies in helping those consumers with debt issues
• Credit and store card holders are to provide annual statements detailing the cost of borrowing that will be compatible with other providers.
Read our round-up of the best credit card rates
Credit card companies are bleating that the new rules will cost them £600 million a year; I actually read it another way, credit card holders have been mugged to the tune of £600 million per year!
For nearly two years now, the average credit card interest rate has been more-or-less 36 times that of the Bank of England base rate. This extortionate rate has allowed credit card providers to fill their coffers well before the new regime actually started and there are reports that card rates are to rise again.
There is no way an industry can afford to lose such an income: are we likely to see credit card providers make redundancies? Impose staff pay freezes? I don't think so because I believe they only volunteered for the code in the knowledge they will recoup their losses in other ways. Thinking caps are on for the marketing team, so I expect credit card interest rates to remain high, if not increase in the foreseeable future.
Is credit a bad thing?
I see nothing wrong with credit, providing you can afford to pay it back. A credit card can give you peace of mind and confidence that you can buy your way out of a sticky situation, like being stranded when the ash cloud struck last year and there are other benefits such as purchase protection if the supplier were to go bust or the purchase did not arrive.
That aside, to spend and make purchases on goods and services you would not otherwise be able to afford is one recipe for disaster. Credit card companies play on those that wish to live a life beyond their means, offering the funds to acquire luxuries that for the average consumer would otherwise be out of reach but for a credit card, (or perhaps better described as a 'Debt card'!).
Lending money through a credit card is a lucrative business for the card provider as minimum repayments are mathematically designed to make your debt linger and make the card providers more profit. For example a credit card debt of £1,000 attracting an APR of 18% with payments of 2% or £5 would take around 26 years to clear with interest payments of £1,885, (source: Moneysavingexpert.com.)
Are you lying to your loved one about your credit card debt?
I spoke with a client earlier this week who was assured by her fiancé that his credit card debt was reducing; now she has found out that he paid for the wedding on the card and is only making minimum repayments.
He and many others are lying to their spouses and loved ones about their credit card debt. Some turn to alcohol, gambling or even crime in an attempt to solve their problems. Many I see or talk to are suffering from depression and contemplating suicide.
Morally and socially we have been encouraged to spend and pay later through slick marketing and the easy availability of credit, mainly through credit cards. From this we have developed a culture of 'must have now' that has to change. Will these new rules do this? Not a chance.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.