Credit card crack-down
The Prime Minister has pledged to ban credit card cheques and to crack down on credit card companies that raise borrowing limits when the customer has not requested the increase.
Gordon Brown says his government will introduce new laws “at the earliest opportunity” to ensure customers are protected during the downturn rather than encourage to get further into debt. He told consumer groups at a Which? forum on personal finance: “When we see hard-working, hard-pressed people being buffeted about by a storm not of their making, we will never pass by on the other side."
Measures proposed by Brown include new legislations to stop credit card lenders increase borrowing limits without being requested to do so by the customer. It will also stop the practice of firms sending unsolicited credit card cheques.
Credit card cheques allow people to pay for goods and services on credit, and often come with extremely high rates of interest. Credit card companies have come under fierce criticism for sending these cheques out to customers unsolicited – potentially tempting people to rack up huge bills.
Peter Vicary-Smith, chief executive at Which?, credit card companies have been getting away with this sort of behaviour for too long. “Sending people unsolicited credit card cheques and extending their credit limits without being asked, in the hope of tempting them to overspend, is not just irresponsible – it’s immoral,” he adds.
The government also plans to give consumers better protection from bailiffs. It plans to regulate the bailiff industry, to ensure they do not abuse their powers of entry.
Teresa Perchard, director of policy at Citizens' Advice, welcomes the measures: "[They] will also help encourage more responsible lending [and] should help ease some of the financial hardship people are suffering and make things fairer for consumers burdened by debt.”
However, industry commentators are less enthusiastic.
Some argue that making credit widely available is a good thing as long as people are encouraged to manage their repayments properly and stay in control of their debt.
At the same time, there have been calls for tougher measures on credit card companies – for example, potentially banning providers from employing negative payment hierarchy.
This is where your lender uses your payments to pay off the balances attracting the lowest interest rate first. Therefore, if your 0% purchase deal has expired but you still aren’t attracting any interest on your balance transfer, then your payments will be used to pay off the transferred balance rather than new spending.
The crux of this is that you will end up paying more in interest, as your purchase debt (possibly attracting interest of around 18% APR) will not reduce until the balance transfer is paid off.
Peter Harrison, credit card expert at moneysupermarket.com, says: "If the government actually wanted to make a substantial difference to credit card lending practices, it would insist that payments made by people were assigned to the highest interest debt first and that people weren't allowed to exceed their credit limit.”
The vast majority of credit card companies use negative payment hierarchy. However, in the US, this will soon be illegal with providers obliged to use payments to pay off the most expensive debts first.
Nationwide, which already adopts positive payment hierarchy, believes the government should follow the example of the US. It estimates customers could save up to £213 in the first year, by taking a card that allocates payments in a positive way.
Jeremy Wood, consumer finance director at Nationwide, says: "Consumers can ill-afford to lose this much money, especially in the current financial climate."
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.
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%.