Tuesday, Oct 27, 2009
Proposals for faster Credit card debt repayment
BBC: Credit card terms 'to be curbed'
Some unfair credit card terms are to be outlawed under proposals being put forward by the government. It wants to stop card firms raising interest rates on existing debts and to prevent them raising someone's spending limit without authority. Monthly repayments must be used to pay off the most expensive debts first, and the size of minimum repayments will be raised to ensure faster debt repayment.
Posted by jack c @ 09:02 AM (650 views) Add Comment
7 Comments
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1. Tennouji said...
I was really annoyed when my card limit was raised from 1,500 to 8,000 without my consent. I had to put in writing that I wanted it back the the previous level! My immediate concern was if it were ever stolen/abused but I thought their feeble attempt to get me to borrow money I didn't want or need was disgusting. My balance was zero at the time and remains so now.
2. Fraccy said...
I can't currently spot the catch but most of the legislation usually seems to help the finance sector offload risk onto someone else. On the face of it though, these sound like very good changes.
3. Pooodle2 said...
This is going to give a nasty shock to a lot of people....and will directly affect mortgage affordability calculations downwards
I don't know what the typical credit card debt is; but lets take a simple example:
£10,000 debt at 2% minimum payment = £200
£10,000 debt at 5% minimum payment = £500
People are going to struggle to find that extra £300 a month
This will directly affect the mortgage they can afford.....
I undertand the math of low minimum payments being BAD and meaning that it takes forever to pay it off.
But lots of people think its GOOD because there payments are smaller
they don't understand the small print and compound interest :-(
Anyone know what they have proposed as the minimum monthly percentage?
4. jack c said...
If the minimum payments are raised and the debt is intended to be repaid quicker then the mortgage lenders will have to take this into full consideration as part of the affordability process when assessing a mortgage application . This will (IMO) reduce the amount available to borrowers who have outstanding credit card debts. At the height of the boom (if indeed that is the correct term) Northern Rock disregarded applicants credit card liabilities.
5. estrader said...
"We think it's simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible."
Sure it is...a boom built on a policy of borrow and spend...a policy that GB is doing everything in his power to maintain...a policy that even experts think is the key to getting Britain out of recession...what was the reason for reducing VAT if not to "to entice people into spending more than they can afford and then to squeeze as much money out of them as possible"...what an absolute joke!!
6. jack c said...
estrader - there is mounting evidence that interest rates are set to rise (see flinsters post from yesterday and my latest posting) - this will in conjunction with the latest proposals (assuming they are implemented) extinguish the cheap credit party.
7. 51ck-6-51x said...
OK... transparency is good for the consumer here. Simple terms are generally preferable.
1) Changing the order of priority for credit card repayments, so that the most expensive debts, such as cash advances, are paid off first
- This seems good for the consumer
2) Increasing the minimum amount that must be paid off each month to accelerate the overall rate of repayment
- This may be seen in oth lights. For those who only pay the minimum ever, it's good, as it will take them longer to get in debt to their eyeballs, but it's a fairly perverse way to attempt to curb high debts. Furthermore it is well known that having a minimum payment REDUCES the amount paid by those who pay off something other than the maximum ( due to the psychological effect known as anchoring ), I would suggest NO minimum - people need to understand that their finances are in THEIR hands. Maybe those who struggle with mathematics at school should be warned against taking on debt?!
3) Banning the practice of raising borrowers' credit limits without their prior consent
- This seems very good for the consumer, I cannot see a downside, if one wishes to extend ones credit, one should seek to. At some point a decision was made about the limit and less attentive consumers may well not read letters which change their terms carefully and may spend on their card until it hits the limit, knowing it can be paid upon receipt of their next pay cheque, if that limit is increased they could find themselves in deep trouble fast.
4) Restricting or banning increases in interest rates on debts already incurred.
- Sometimes the variance is used for really evil purposes designed to push people's heads underwater once they are waist deep. However, outright banning is bad in this case IMO. Why not allow variable rate credit lines? So long as the terms are clear and the consumer can make a logical decision. Better to address the way terms are written and presented to the consumer than to legislate away optionality. Those increases that are triggered by late payments ( the really evil end ) should certainly be made extremely clear in any contract as well as requiring at least 30 days notice upon such an event occurring in a red-bill style letter.
All in all they should bear in mind that the credit card companies are in the business to make money. Competition drives them to make their contracts less clear to the consumer, whilst maintaining marketability. The only regulation should act to make contracts understandable, but the real key is education ( it's sad isn't it? ).