Credit card cheques banned
The government has proposed an outright ban on unsolicited credit card cheques under new plans to tackle the high levels of personal debt in the UK.
An official White Paper, entitled "A Better Deal for Consumers", also reveals that loans with interest charges above 50% - such as payday and doorstep loans - are to be investigated by the Office of Fair Trading. Alongside this, the White Paper promises to tackle rogue traders with the courts given new powers to ban persistent offenders.
Credit card cheques are used like personal cheques, but because they are linked to a credit card rather than a current account, any spend attracts interest. This is usually far higher than the credit card's APR and there are no interest-free periods. There are also handling fees for using a credit card cheque, often as much as 2% of the transaction cost.
The Office of Fair Trading estimates credit card cheques cost people £57 million in interest each year. The White Paper proposes banning unsolicited credit card cheques, which it warns can "tempt" consumers unaware of the high interest rate charges.
The new measures are part of a government drive to reduce the level of personal debt in the UK. According to the Bank of England, Brits owe a collective £233 billion on credit cards, overdrafts and loans, while the latest debt statistics from charity Credit Action, show personal debt has increased 1.4% - or £17.9 billion - over the past year.
While there is an element of personal responsibility in not taking on more debt than you can cope with, there is a host of evidence that suggests banks and other lenders are pushing consumers into borrowing.
Over the past 12 months, 5.7 million people have received a boost to their credit card limit with an average increase of £1,538, according to uSwitch.com.
Louise Bond, personal finance expert at uSwitch.com, says: "Providers are taking away consumer choice by throwing extra credit at people without their consent. There is also a question mark around how these people are selected for an increase or decrease to their limit and if this in itself is in the customer's best interest.”
Elsewhere, Barclaycard recently came under fire for reducing the minimum monthly repayment on its credit cards to just 1.5%.
Although it said the move would make it easier for customers to meet their repayment commitments even if they weren’t feeling financially flush, it was accused to encouraging people to rack up debt; it would take someone 98 years to clear a £5,000 balance paying interest of £22,300 if they only made the minimum repayment each month.
Around 68% of people pay their credit card bill off in full each month, according to the UK payments association, APACS.
For these people, spending on credit card is actually a wise move in many respects as it allows them to balance out the cost of purchases across the month and also affords them protection under the Consumer Credit Act. For cashback card holders, spending on credit is actually a way to make money.
But the remaining 32% could be building up dangerous levels of personal debt. “Keeping high levels of debt on interest bearing credit cards isn't advisable as it's an expensive form of borrowing,” explains Bond.
Credit card interest rates – APRs – have jumped by 0.74% in the last year from 16.95% to 17.69%, she adds.
Ron Gainsford, chief executive of the Trading Standards Institute, says the White Paper will also help tackle rogue traders, who prey on vulnerable members of society.
"The announcement of ‘banning orders’ that could be imposed against persistent rogue traders could be a tremendous asset to the trading standards toolbox of methods aimed at protecting consumers from unscrupulous businesses," he says.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
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%.