First comes the crash and then the suggestions on how to prevent it happening again. To put it another way, the Government and its regulators are busy shutting the stable doors after the horses have already bolted.
The latest proposal for the clean-up of the financial sector focuses on credit cards. There have long been criticisms of credit card issuers for charging practices that can severely penalise customers. Under plans just published, the worst of these will be outlawed.
In future – assuming the proposals become law – credit card companies will be prevented from treating payments received as automatically paying-off first the cheapest debts, leaving outstanding the most expensive debts. Consumers can continue paying 25% or so interest on withdrawn cash, long after they took out the money on their credit cards. The Government intends to stipulate that card companies must treat the most expensive debt as paid-off first.
Card issuers would also no longer be allowed to increase the rate of interest they charge on outstanding balances. In addition, the Government is considering raising maximum credit limits unless the borrower requests this, or consents to it.
The Government further intends to require card companies to increase the minimum monthly repayments on card balances, to ensure there is a reasonable prospect of an account being cleared. At present, minimum repayments can leave a borrower in long-term debt.
UK consumer minister Kevin Brennan explains: “It is not acceptable for card companies to impose complex and confusing terms and conditions that can leave people baffled, or to increase interest rates without a proper explanation. Consumers have a real responsibility to manage their finances properly, but they also have a right to clear information to enable them to do that. Consumers should not feel each month as if they’ve been exploited or disadvantaged.”
The measures have been welcomed by consumer groups. “For too long, card companies have been allowed to apply the tricks of their trade to the detriment of millions of consumers,” says Which? personal finance campaigner, Phil Jones. “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. The sooner these practices are stamped out, the better.”
Michelle Slade, of Moneyfacts analysts, agrees. “For far too long the card companies have been able to get away with practices that are not in the best interests of the consumer,” she says. “Most consumers are unaware of the payment hierarchy system on credit cards, that in most instances sees the cheapest debt repaid first while the most expensive debt is paid off last.
Earning a fortune at our expense
“This practice earns the card companies a fortune in additional interest at the expense of the consumer and goes against the advice consumers would receive at a debt agency, which tells them to repay the most expensive debt first. Card companies including Bank of Scotland, Capital One Bank, Halifax and MBNA Europe Bank have all made recent moves to reduce the minimum payment customers are required to pay. This process gives short term gains to customers looking to reduce their outgoing, but stores up longer term problems, as the total amount they will end up paying will be much greater.”
Julie McCurley, head of money affairs at Northern Ireland’s Consumer Council is also pleased. “The Consumer Council welcomes the Government’s consultation on credit and store cards,” she says. “Credit card companies must show more responsibility in their lending practices. Alongside changes to the credit card industry, consumers also need help to manage their finances better, make informed choices about their money and stay out of unmanageable debt.”
But there are anxieties about the proposed changes. With the most expensive debt to be paid-off first, card issuers will find it less lucrative to offer interest-free periods for new customers. This may assist people on lower incomes to avoid trapping themselves into unaffordable debt, but it will penalise savvy consumers who play the card companies by moving debt between accounts.
Card companies may respond by imposing annual fees, or seek alternative ways to recover lost income. Melanie Johnson, chair of The UK Cards Association and a former UK consumer minister, warns the result could be less choice and less competition in the credit card market, with a squeeze, in particular, on reward schemes.
For the moment, though, the credit card market remains very competitive. The AA Credit Card, launched last week, has immediately become one of the most attractive. It offers 0% interest on balance transfers for the first year for consumers who respond within the first 90 days. There is also 0% interest on some motoring-related spending, including AA membership and breakdown cover, insurance and fuel purchases. In addition, the card collects reward points on all spending.
Several other cards are appealing. Tesco, Sainsbury’s, Lloyds, Marks & Spencer and Halifax all offer introductory periods of interest free purchases, while Virgin, Santander, Halifax, BT, Nationwide and Egg all offer interest free deals on balance transfers. There are also several good rewards schemes, including that on the Barclaycard Goldfish MasterCard.
Savvy consumers should make the most of the deals out there now, they may not be available for long. But the advice with credit cards is always the same – avoid accumulating debt that you cannot be sure you can repay.
Q. I am interested in taking out a fixed rate one year bond. Your best buys do not include the Post Office Growth Bond which pays out 3.70%. Why not? DP.
A. The charts prepared for us by Moneyfacts exclude products that are unavailable in Northern Ireland and also some that are not promoted here. The best one year bond offered by a Northern Ireland institution is from the Progressive Building Society, which pays up to 3.60%. The best of all the institutions operating across the UK at present is from National Savings and Investments, which pays 3.95%. Others which pay higher rates include the State Bank of India and Saga, both at 3.75%.