Will new credit card rights help us clear our debt?
With the government announcement of a new regime under which credit card providers will have to operate Myfinances.co.uk's Kate Saies examines how the shake-up of the credit card system in the UK will both benefit and hinder us in the coming years.
Imagine you were sitting next to someone on the train and they had an allergic reaction to some peanuts they were eating. They begin to struggle, possibly choke or start having a fit.
The last thing you would do, in this situation, is give them another peanut to eat. It would be cruel.
Yet, when a credit card customer has reached the limit on their card and is clearly struggling to pay off their debt, it has been perfectly acceptable for the provider to throw more money at them.
Surely, offering people who are clearly drowning in credit card debt more credit is just going to worsen their problems? Like ramming another peanut down the allergy sufferer's throat?
Thanks to new rights agreed by the government and credit card industry, however, credit card providers will soon come under tighter rules when it comes to carrying out such practices.
And, what's more, the new measures due to be introduced later this year involving the way minimum payments are calculated and the order that debt is repaid, are set to prevent people getting lost in the quagmire of their mounting card balance in future.
But while there is widespread applause for the outcome of the Credit Card Consultation not all the changes are being welcomed.
And there are fears the measures do not go far enough to protect vulnerable consumers.
It was the PM, Gordon Brown, himself who delivered the speech outlining the changes being implemented to credit cards.
These new rights, he said, were set to affect around 30 million credit card users and were estimated by the government to save consumers almost £300 million, collectively, a year.
They would "move the balance of power back towards consumers" and also halt irresponsible lending practices, he explained.
He announced five 'rights' to be introduced.
The first, the right to repay, means when we make a repayment on our credit card we will repay the highest debt first.
If you pay your bill in full every month, this is probably of little concern. But if you repay the minimum amount only, this becomes highly pertinent.
This is because when calculating the minimum payment, at the moment, many credit card companies get us to repay the cheapest debts on our card first. This includes things like zero per cent balance transfers.
For many, this means minimum payments are set up so that they are barely paying back the interest that has mounted up that month, let alone the main bulk of the bill.
Under the new rights, this will change. Credit card providers must put customers' repayments against the highest rate debt first.
This will cover interest fees and charges, plus one per cent of the principal.
David Black, banking specialist at independent financial research firm Defaqto, says: "The dangers of making low minimum repayments cannot be emphasised enough.
"Someone making a minimum two per cent monthly repayment on a £1,000 balance on a credit card charging 20.9% APR would take 37 years one month to clear the balance.
"If they repaid £50 every month, the balance would be cleared in two years one month."
Until the measures are enforced, however, Defaqto is urging consumers to check their bills to see if their provider is allocating the most expensive debt first.
A whopping 79% of credit cards currently allocate payments with the cheapest debt first, says the research company.
It adds a positive order of repayments should have fees first, then charges, followed by interest, and then debt bearing the highest interest.
If your provider is offering a negative order of repayments they are likely to be asking for default charges first, then promotional balance transfers, then promotional purchases and hugely expensive cash withdrawals at the end.
This 'right' is not necessarily good news for all consumers, however. Mr Black warns it will be costly to the credit card industry, which will attempt to regain the lost income through other means such as less attractive zero per cent deals.
And he is right, just days after the government announcement Virgin cut the length of its balance transfer offer from 16 months to 14 months.
Moneysupermarket.com's credit card expert, Peter Harrision, says: "Ultimately, it is consumers who will be losing out as lenders reduce their zero per cent offers in response.
"I would expect further changes in promotional offers over the coming weeks."
Mr Black says people should check the repayment terms, if this is a key driver for their application, before taking out a credit card in future.
Under the new set of rules, consumers now also have the 'right to control', which relates to the credit limit increases.
We, if we wish, will soon be able to refuse a credit card company's offer to increase our limits and we can reduce it at any time.
We will be given better automated payment options, and we can access this online. We can also go online to refuse credit limit increases or cut our current limit.
Research by uSwitch.com found six million people had their credit limit hiked without their consent. The average increase they had seen was £1,538, with their limit pushed from £5,129 to £6,667.
The average interest bill, said uSwitch, therefore jumped from £800 to £1,040.
Citizen's Advice has welcomed this move, saying credit cards play a major part in the debt problems experienced by its clients.
Teresa Pritchard, director of the charity, says: "Too often we have seen situations where individuals' credit limits have drifted up to totally unaffordable levels, making it impossible for them to address their debts if they lose their job or hit financial crisis."
As an added boost, under the third ' right' customers can now reject increases to both their credit limit and their interest rate.
The final two 'rights' relate to information and comparison. Not only will people at risk of financial difficulties be given guidance on the consequences of paying back too little, but all customers will receive an annual statement so they can see how their deal compares with other providers' cards.
Mr Harrison says this is useful but thinks issuing statements annually is not enough.
"Consumers should frequently check online to compare their credit card rates, and if necessary switch to a card which better suits your needs."
He also urges anyone planning to switch their credit card debt to check if they are allowed to transfer their balance to a new provider.
It seems the new measures are being welcomed, but also that many feel there is still more to be done.
The Association of Business Recovery Professionals, known as R3, the trade body for insolvency professionals, thinks there should be a limit to the number of credit cards people can take out.
And it is also calling for a ban on point of sale store cards issued by unqualified staff.
Meanwhile, Consumer Focus thinks the new rules on unsolicited credit limits do not go far enough to protect customers.
It thinks the credit card holders themselves should request any limit increases rather than have it 'drop on the mat'.
But many also believe it is up to the consumer to take control of their credit card finances too, and here are a few suggestions:
1. Try to pay back more than just the minimum balance, even if it's only a couple of pounds more. Joanne Garcia, head of credit cards at Confused.com, says: "Paying back an extra £10 per month could help pay off a debt of £1,000 on a 14 % APR credit card in just over five years, rather than 19 years if simply the minimum two per cent is paid off."
2. Check your credit card statement carefully to find out if your provider is making you pay back cheaper debt first. If they are either increase your minimum payments or switch to a provider who does not do this.
3. You should not feel bound to one credit card. Do your research, look at other deals, and if there's another card with lower interest or better terms, switch to that. It could save you money.
4. If you don't think you can pay it off, don't take out a credit card in the first place.
5. If you do decide to go ahead and apply, ensure you check the repayment terms to ensure they offer the most positive payment hierarchy.
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