Big news for British borrowers!
After years of campaigning from consumer groups and money experts, a government white paper has announced a full review of how credit cards and store cards are regulated.
As part of the review, some of credit card companies' craftiest tricks will be examined, and some may even be banned outright!
In this article, I'll round up the steps the government may take to help defend consumers from dangerous credit card debt.
At the same time, I'll explain what you can do right now to protect yourself from these nasty plastic pitfalls.
1. A ban on unsolicited credit card cheques
Credit card cheques are a much-loathed money menace. Often, they're sent to consumers in an attempt to encourage extra spending.
However, unless they are offering a special 0% or low-rate promotion, cashing credit card cheques is usually an awful way to borrow.
As a general rule of thumb, spending using a credit card cheque means you'll be charged a significantly higher APR than if you'd simply put your purchase on plastic.
What's more, most providers charge an additional handling fee of around 3% when consumers cash credit card cheques.
Even worse, while most credit cards come with an interest free period, credit card cheques are unlikely to.
This means that, even if you pay off what you've spent within a month of using your credit card cheques, you will still be charged interest.
Luckily, by this time next year, lenders should no longer be able to push them through our letterboxes unless we have specifically requested them.
In the meantime:
• If you receive credit card cheques that contain anything other than 0% or low rate offers, send them straight to the nearest shredder!
• Even if the credit card cheques you're sent look useful, always read the small print.
2. A look at negative payment hierarchy
In addition, the government's review will look at whether lenders should be allowed to continue negatively ordering credit card customers' repayments.
Negative payment hierarchy is the practice of using a borrower's money to repay their cheapest debt first.
Because not all forms of debt attract the same APR - even when they are held on the same credit card - lenders allow borrowers' most expensive balances to persist for as long as possible.
For example: if an individual had transferred a balance to his credit card at 0%, but had also made new purchases at 16% APR, the vast majority of lenders would force him to pay off his entire balance transfer before his purchases debt could be reduced.
Sadly, most consumers are unaware of this sneaky situation - which is why it makes credit card companies massive profits every year.
If the government sees fit to ban negative payment hierarchy, this will be a brilliant victory for British borrowers.
In the meantime:
• Never spend on a balance transfer credit card! For more information on why, read this article.
3. New restrictions to prevent credit companies increasing the cost of existing debt
Since the credit crunch began, huge numbers of consumers have had the rates on their credit cards hiked. This has caused the cost of their existing debts to spiral.
Companies have claimed this is in response to the increased risk of borrowers defaulting on their debts during the recession. However, the government's white paper is clear: “Card providers are still putting up rates without properly explaining why and without any obvious change in … consumers' circumstances.”
As part of its review into credit and store card regulation, the government says it will look at whether lenders should give their customers clearer information about why they have chosen to raise rates. It may even restrict the circumstances in which increases can be applied to existing debts.
In the meantime:
• Don't give your credit card provider any excuse to raise your interest rate - especially if you are currently benefiting from a 0% deal. Making a late or inadequate monthly repayment may be used as a reason to charge you more, so make sure you keep on top of your credit card bills.
4. A ban on mini MMRs
Your credit card's MMR is the monthly minimum repayment you are required to make on your debt. Up until recently, most credit card providers demanded MMRs of 2-3% of customers' balances, or flat repayments of around £5 - whichever was the greater sum.
However, the size of the MMRs demanded by lenders has begun to shrink since the credit crunch. Most credit cards issued by Halifax and Bank of Scotland (HBOS), for instance, come with tiny MMRs of just 1%, and Barclaycard recently cut its MMR for some customers to 1.5%.
Reductions like these are a disaster for cardholders who only ever pay the MMR. They could mean that even a modest debt takes many decades to repay, because as the amount you owe your lender decreases, so will the sum you regularly pay off your debt.
A borrower who owes £2,000 on a credit card at 16.5% APR would be in debt for 80 years if they never repaid more than their lender's 1.5% MMR.
What's more, they'd pay an incredible £10,162 in interest during that period: more than five times the sum originally borrowed!
If the government forces lenders to increase their MMRs to a reasonable level, they will strike a crucial blow in favour of consumers.
In the meantime:
• Protect yourself from decades of debt by setting up a direct debit for an affordable sum that you can pay off your credit card each month.
5. A ban on unexpectedly increasing credit limits
Finally, the government's review of credit card regulation may lead to a ban on lenders increasing customers' credit limits without asking.
This practice is seen by some consumer groups as irresponsible, and a deliberate temptation to consumers who have not applied to borrow more.
A report on the future of credit cards will be published this autumn, and should reveal exactly what measures will be taken to combat all issues I've outlined above.
In the meantime:
• Avoid borrowing more than you need, even if your lender offers you more credit.
• Request that your credit limit be reduced if you feel it is too high.
To learn more about clever credit card management, read this article by Victoria Bischoff. Also, why not check out these five things most people don't know about their plastic pals.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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