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Your Money > Credit Cards Articles > Ready for the...
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By Sarah Modlock
In an attempt to curb temptation and keep debts contained in the future, new laws will be introduced to stop card issuers automatically raising credit limits when not requested by the card holder. This is something that currently happens as a matter of course and it's easy to see how commercial focus could drive some card companies to make even more money out of customers who show signs of paying off interest for a long, long time. We currently owe something in the region of £53billion in unpaid balances. Credit card cheques - pure evil The best news is that unsolicited credit card cheques, which are possibly the worst financial products ever dreamt up, are to be banned. Unfortunately the desperate will still be able to request them but at least the dreaded chequebooks will be cut back. Designed as debt traps, these look almost exactly the same as ordinary bank account cheques and can be used for payment where credit cards are not accepted. If you have ever had to withdraw money using a credit card then you will know that it costs considerably more than the usual rate of interest for purchases. With many cards, the rate is more than doubled for cash withdrawals. Credit cards cheques are usually charged at the same rate as cash withdrawals - typically 26% or more. This means you will pay an immediate handling charge of around 3% per cheque. With most lenders, you will also be charged interest immediately instead of the having the 45-59 day interest -free period given for purchases. Use them abroad and costs will be added for currency conversion. Some banks such as NatWest and BBS stopped issuing credit cheques when it became clear how damaging they could be to borrowers. Other card companies such as Capital One insist on sending them out regularly. Annoyingly, they are issued without being requested by the customer so have the added risk that they may be intercepted by fraudsters. "We are concerned that people may be tempted to borrow irresponsibly if credit card companies increase borrowing limits without this being requested by customers, or send out unsolicited credit card cheques," said Consumer Affairs Minister Gareth Thomas. "It's vital we protect consumers at this time and we are exploring these issues carefully," he added. The payment association, Apacs says only 7% of the cheques sent out are actually used. Research from uswitch says 423,000 people used the cheques to pay money into their current accounts last year and another 300,000 used them to pay utility bills. The £3.6billion spent on them last year generated a tidy profit of £571million in fees and interest. But a huge 97% of credit card cheques are not requested by the customer. Apacs defends them by saying the cheques they draw on a customer's existing credit limit, rather than increasing it but that's not the point. Yes customers should have self control and take responsibility for their spending. There are many people who work hard and save up to avoid credit. But how any company can get away with bumping up the interest and charges as they do with these cheques, is beyond me. And if so few of them are being used, the industry won't miss them any more than the customer. What more can be done? Surely the government has only scratched the surface of what needs to be done to make the credit industry and its customers more sensible? How about a compulsory minimum monthly repayment so that people are not stuck in debt for decades but must make some sort of dent in what they owe? This would also be a disincentive on working up more debt. Some are calling for the government to cap interest rates on credit cards but this doesn't cut much ice with free-marketeers. Perhaps something could be done to change the interest rate lottery where card companies advertise a 'typical' rate in huge figures but end up giving you a much higher rate when you apply, allegedly to reflect your credit rating. Peter Harrison, credit card expert at moneysupermarket.com, makes some interesting points: "The Government, either through accident or design, has really missed the point here. If it actually wanted to make a substantial difference to credit card lending practises, 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. "At present, most providers assign payments to the lowest interest debt initially. As for credit limits, people are generally allowed to exceed their limit once, which means they are charged a £12 fee and lose any zero per cent offers they might be on. Each of these slips by a person can cost them hundreds of pounds in interest. Welcome though it is, this Government crackdown will only make a minor difference - rather than the major steps it could take by insisting on two simple changes." The disappearing credit limits..and houses If you are still trying to kick the credit habit then you may find it is shortly done for you. Many card issuers are reviewing accounts and reducing credit limits to restrict spending. For example if your card limit is £3,000 and your balance is currently £600, you may find the card issuer suddenly drops your credit limit to £700 without any warning. This is happening now to regular card users as well as those who only spend on their credit card occasionally. If you're planning to make a large purchase then it may be a good idea to double check how much credit is available to you. Meanwhile, if you're tackling your debts and are considering a consolidation loan then make sure you avoid the companies which roll several unsecured debts into a new debt which is secured on your property. These companies are usually easy to spot as they make a point of saying they help 'homeowners' or will ask whether you rent or own fairly quickly. Make sure you read all the small print before you sign anything or you could lose your home over a credit card debt. Homeless charity Shelter believes more than 5,000 homes have already be reclaimed this way, often over relatively small debts. Gordon Brown says he is looking into this. I'm sure that will be a comfort to you... Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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