Gordon Brown has set his sights on credit-card companies in an effort to tackle the nation’s £53.9bn of credit-card debt. Four largely sensible proposals – more on these below – are being considered. However, the results of the consultation won’t be out until April, and even then, the government may just ask credit card firms to provide customers with more information. In short, a plastic revolution may be a long time coming. The good news is, there’s plenty you can do to look after your own interests in the meantime.
First off, the government wants minimum payments increased. Between 2002 and 2008 the number of people only making the minimum payment on their credit card increased by a third. The problem is that by only making the minimum payment every month, you take much longer to repay debt. So you end up paying a lot more in interest. To tackle this the government is looking at rules that would force credit-card companies to increase minimum payments from the current average of 2%-3% to 5%. That’s a step in the right direction, but there is a good alternative.
Fixed minimum payments, calculated as a percentage of outstanding debt, fall along with the size of your debt. So a better idea is to establish a fixed monthly repayment amount on your credit card and abandon minimum percentage-based repayments altogether. But most direct debit forms only offer you the choice of either paying the minimum percentage payment each month or clearing the full balance. So MoneySavingExpert.com’s Martin Lewis suggests you write on the form the fixed amount you want to pay, then call your credit-card firm to confirm that it’s set this payment up. “The credit-card company should honour it.”
Next, the government wants to tackle automatic credit limit increases. These should be banned, as they are just a way of tempting borrowers to take on more debt. Last year, 5.7 million people had their credit limit raised without being asked. Third on the list are arbitrary increases in interest rates on existing debt. That’s fine, but don’t wait for the government to act – if your card company tries it on, don’t put up with it, just switch credit cards.
The final proposal deals with ‘negative payment hierarchies’. This is the system whereby repayments are matched first against the outstanding debt with the lowest interest rate. For example, you may have a balance transfer rate of 0% but pay 15% on credit-card purchases. So if you then buy a £200 TV using your card, that £200 will sit on your card accruing 15% interest until any amount enjoying the 0% balance transfer rate has been repaid. Nationwide and Saga are to be congratulated as the only major lenders who don’t use this method. Steps to end the practice would be great news. Until then, remember never to buy anything using a balance transfer card.