Credit Card Rules to Change Following Government Legislation
As a nation, we owe more than £53.9 billion in credit card debt, and the government is launching a whole set of new proposals aimed at drastically reducing that figure including increasing minimum monthly payments and banning automatic limit increases on cards – both typical credit cards and store cards alike.
Although the proposals are still very much in the planning stages and we might not see any action until as late as the first quarter of 2011, here are some of the main proposals and what they mean.
- 1. Automatic Credit Limit Increases
This could lead to the banning of automatic credit limits, which the government believe are major causes of people getting themselves into more debt. Softer ideas include putting out better information about automatic rises and limiting the size of the rises as they are given.
- 2. Increase Minimum Payments
Curbing the debt cycle will require many more people to pay off their cards much faster than they currently do by using the minimum monthly payments. Often this reaches between 2% and 3% and only barely covers the interest on the card meaning you could potentially be paying off the card forever.
Again, the more lenient options include more information while the tougher one wants to create a limit on how small a minimum repayment can get. Increasing minimums will get people out of debt faster although simply blanketing the payments could lead to a lot of people defaulting on their cards because they can’t afford to pay the new rates.
It’s also likely to be a bad idea for anyone with more than one credit card as higher minimums will make it harder to pay off higher priority debts first.
- 3. Anti Ratejacking Measures
Ratejacking occurs when credit card companies push up the interest rate on your debt without warning or justification. This has already been discussed by the government previously, and new laws mean that credit companies have to be more transparent. However, the new tougher approach is talking about banning the practice entirely so a interest rate remains fixed.
- 4. Applying Payments
Most card companies apply payments to the cheaper debt first, meaning expensive debt is trapped and incurring larger and larger sums of interest.
This could be changed so that payments will be applied to the most expensive debt first my default – the system that Nationwide already uses – and could make a significant difference to those in debt.