Shoppers refuse to end love affair with plastic
A surge in retail spending may have provided some relief from the impact of the credit crunch, but new figures show shoppers are increasingly putting their purchases on plastic – and are failing to pay off their balances.
Sales on the high street increased by 3.5% during May, according to the Office for National Statistics, the strongest monthly growth since January 1986. However, the amount of new spending on credit cards increased by £0.5 billion to £7.5 billion, up on the previous six-month average of £7.4 billion.
In addition, credit card repayments levels were lower than expected having fallen from a monthly average of £7.6 billion since the start of 2008 to £7.5 billion.
The statistics, published by banks through the British Banker’s Association (BBA), suggest that the shift in attitude away from spending on credit has not yet fed through to consumer behaviour.
If this trend continues, then there is a real risk that people could be storing up financial difficulties for themselves.
“The credit crunch is forcing people to tighten their belts and budget cut, but many are not yet prepared to give up their spending habits,” says Ricky Bruce, a credit card researcher at Moneyfacts. “Many people, faced with the stark reality of increasing inflation and limited pay rises, may be tempted to limit their outgoings by reverting to the minimum payment on their card.
"These can vary dramatically depending on the card used and consumers need to be aware this could greatly increase the amount of additional interest debt they are accruing on their card and could mean the original debt takes an astonishing time to repay."
However, many consumers are not in a position to reduce their spending on plastic. Steve Willey, head of credit cards at moneysupermarket, says people are trying to cope with the rising cost of living by spreading their payments out over time.
"People are putting their day-to-day costs on credit in order to reduce the impact of the credit crunch," he adds. "The risk is, is that down the line this will catch up with them and they may find they are no longer able to spend on credit at all. At this point, many will have to consider a debt management plan, IVA or even bankruptcy."
Some credit cards allow borrowers to make minimum monthly repayments of as little as £5. However, the temptation to only make the minimum payments can leave shoppers racking up debt.
You can find out how much you could save by increasing your credit card repayments with Moneywise's repayment tool.
You can also see how long it will take you to pay off your debt (and how much it will cost you in interest) if you decide to just make the minimum repayments.
For example, a debt of £3,000 on a card with an APR of 18.9% will take you 520 months (43 years) to pay off if you only make the minimum 2% repayment each month.
In total, you will pay £9,755.80 in interest while paying off this balance.
According to financial website Moneynet, increasing your repayments by 1% on the same debt will save you over £1,200 in interest costs.
Andrew Hagger, of Moneynet, warns households already finding their budgets squeezed by increased petrol, energy and mortgage costs, are giving in to the temptation to repay only the minimum balance on credit cards.
But he warns this is a false economy: "Whilst credit cards used correctly can be a great way to ease a temporary cash flow problem, they can prove to be a real financial albatross round your neck if you slip into the habit of only repaying the absolute minimum."
If you are in a position where you are racking up debt on a credit card, then it might be a good idea to switch to a 0% balance transfer deal, coupled with a 0% new purchase deal if you intend to keep spending on the card.
Bruce adds: "Customers who do only pay their minimum repayment should also keep an eye on what they are paying. For those that pay by direct debit, keep in mind that lenders are able to review these repayments levels, and may lower them, meaning the amount repayable may increase even where a customer is happy to pay a little more.
"For those customers who are not good with their finances they could look at choosing a card with the same terms with a higher repayment or moving to a loan with structured payments to ensure the debt is repayed in a term not extending over decades.”
How minimum payments differ:
|Credit card||APR||Minimum payment||Time until debt is cleared||Total interest accrued|
|Virgin Money MasterCard||15.9%||3% or £25||Four years and five months||£341.51|
|NatWest MasterCard||15.9%||2.25% or £5||17 years and four months||£1,000.28|
|Source: Moneyfacts *Based on initial balance of £1,000 after all introductory deals have expired|
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
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%.
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.