Complete Finance Blog

New government proposals have been announced (27 October, 2009) which are designed to get UK consumers a better deal from credit card and store card companies.

UK Prime Minister Gordon Brown said, “This week we are announcing measures to make the credit card and store card companies clean up their act…”

The Prime Minister’s Office through the number10 website listed some of the key areas of concern to be discussed in a consultation period which runs to 19 January 2010:

• Changing the rules that set out the order in which debts build up on a credit card are paid off

• Raising the minimum monthly repayment levels to encourage people to pay off their debt faster

• Banning the practice of increasing credit limits without prior consent

• Placing restrictions on increasing the interest rate on existing debt

As part of the wide-ranging consultation the Department for Business Innovation and Skill has invited any member of the public who has a credit card or store card to leave their views on their website.

One early contributor, on a very tight budget, to the debate makes a very valid point. He said, “I can only agree with these reforms… but if the minimum (credit card) payment rises to 5%, I will go bankrupt.” It’s almost certain that many people will find themselves in the same situation.

It’s impossible not to understand and have some sympathy with this view however the facts on credit card minimum payments are irrefutable. This minimum repayment example, courtesy of financial journalist Martin Lewis highlights the dangers:

For example a 2% minimum payment on a £3000 credit card balance at 17.9% will take a staggering 41 years to repay. Martin Lewis argues that if repayments were fixed at £60 it would only take 7 years to repay.

Credit Card Minimum Payments

Of course the debate over minimum payments is only one strand of the consultation process and it remains to be seen whether the proposal is implemented and if it is, will it force more people into bankruptcy?

Debt Counseling Agency

Essential contributors to the consultation process are the debt counseling agencies. One of the leading debt advice charities, the Consumer Credit Counselling Service (CCCS) has posted a response to the government statement on their website.

Chairman Malcolm Hurlston said, “The government has put its finger on the four main problems that consumers have with credit card debt. We believe that the banks should be able to change their practices on each of these but if they can’t, regulation will be necessary.”

Credit Card and Store Card Debt

As a point of interest, credit cards and store cards accounted for half of CCCS clients in 2008.

Sources:

Martin Lewis, moneysavingexpert.com, Government Cuts up Credit Card Rulebook, 27 October 2009

CCCS, Response to Government Proposals on Credit and Store Cards, 27 October 2009

Department of Business Innovation and Skills, Comment on the Credit and Store Card Consultation, website accessed 28 October 2009

Number10.gov.uk, official site of the Prime Minister’s Office, Proposals Announced to Clean up credit and Store Card Lending, 27 October 2009

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