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The new coalition government may live to regret some of the promises it is making. This week Chancellor George Osborne promised to put an end to ‘unfair’ bank charges, ban ‘excessive’ interest rates on credit and store cards and prevent the courts from ordering the sale of properties where outstanding unsecured debts are less than £25,000.
Credit card rates are high for two reasons – first because the banks can get away with it because consumers are apathetic. But just as important, half of all credit card borrowers pay no interest at all because they pay off their account in full each month. At the same time, bad debts are rocketing and the only way the card companies can cover their losses and still make a profit is to charge high rates of interest to those who use the credit facility. The real problem is that the card companies lending policies have been so lax that probably 25% or more of current cardholders should never have been granted credit in the first place.
But what is an ‘excessive’ interest rate? The 1974 Consumer Credit Act was supposed to put an end to ‘extortionate’ interest rates on consumer credit agreements but given the high risks involved in lending to some consumers, no court has ever defined what is extortionate. The chances are Osborne will have the same problem. He made no mention of door step lending or payday loans where borrowers can be charged 2,000% for short-term loans – and are still not considered ‘extortionate’. This is a far worse problem for low income families than credit card charges.
The devil will be in the detail. One positive step is that people taking out a store card for the first time will be given a seven-day cooling off period. Store account card charge the highest interest rates with some in excess of 30%.
And you have to be careful even if you think you know how much interest you are being charged. Kevin Mountford of Moneysupermarket.com points out that some transactions incur the same higher interest charge as cash withdrawals.
Cash withdrawals typically cost as much as 10% or more extra and most users avoid using their card for this purpose. But using your card for online gambling, buying travellers cheques or foreign currency, electronic money transfers as well as buying postal orders using a credit card are all also typically treated as cash withdrawals and you could end up paying interest of up to 34.9% on the money borrowed.
‘The vast majority of consumers are aware that withdrawing cash on a credit card can be a costly exercise and should be avoided,’ explained Mountford. ‘However, many people do not understand where else their provider will treat purchases as cash withdrawals and can be fooled into making a pricey mistake.’
So stop being apathetic and get yourself a low interest rate card. Best of the bunch is Halifax’s Easy Rate Mastercard which charges only 6.9% if you use the credit facility for purchases. But don’t make cash withdrawals – the rate is a hefty 27.9%
An interesting alternative is Co-op Bank’s Platinum Tracker Visa card for those with incomes of £25,000 a year or more. It has an introductory rate of 0.5% for six months on both purchases and balance transfers. After that the interest charge is 7.7% on purchases. But the rate for cash withdrawals is currently just 4.5% and is fixed at 4% above Bank Base Rate, making it currently the cheapest form of unsecured borrowing available apart from 0% balance transfers. Not many people know about this – Co-op has been very quiet about this very useful facility.
Can Osborne keep his bold promises on banking and credit cards? | Personal Investor | Citywire
Credit card rates are high for two reasons – first because the banks can get away with it because consumers are apathetic. But just as important, half of all credit card borrowers pay no interest at all because they pay off their account in full each month. At the same time, bad debts are rocketing and the only way the card companies can cover their losses and still make a profit is to charge high rates of interest to those who use the credit facility. The real problem is that the card companies lending policies have been so lax that probably 25% or more of current cardholders should never have been granted credit in the first place.
But what is an ‘excessive’ interest rate? The 1974 Consumer Credit Act was supposed to put an end to ‘extortionate’ interest rates on consumer credit agreements but given the high risks involved in lending to some consumers, no court has ever defined what is extortionate. The chances are Osborne will have the same problem. He made no mention of door step lending or payday loans where borrowers can be charged 2,000% for short-term loans – and are still not considered ‘extortionate’. This is a far worse problem for low income families than credit card charges.
The devil will be in the detail. One positive step is that people taking out a store card for the first time will be given a seven-day cooling off period. Store account card charge the highest interest rates with some in excess of 30%.
And you have to be careful even if you think you know how much interest you are being charged. Kevin Mountford of Moneysupermarket.com points out that some transactions incur the same higher interest charge as cash withdrawals.
Cash withdrawals typically cost as much as 10% or more extra and most users avoid using their card for this purpose. But using your card for online gambling, buying travellers cheques or foreign currency, electronic money transfers as well as buying postal orders using a credit card are all also typically treated as cash withdrawals and you could end up paying interest of up to 34.9% on the money borrowed.
‘The vast majority of consumers are aware that withdrawing cash on a credit card can be a costly exercise and should be avoided,’ explained Mountford. ‘However, many people do not understand where else their provider will treat purchases as cash withdrawals and can be fooled into making a pricey mistake.’
So stop being apathetic and get yourself a low interest rate card. Best of the bunch is Halifax’s Easy Rate Mastercard which charges only 6.9% if you use the credit facility for purchases. But don’t make cash withdrawals – the rate is a hefty 27.9%
An interesting alternative is Co-op Bank’s Platinum Tracker Visa card for those with incomes of £25,000 a year or more. It has an introductory rate of 0.5% for six months on both purchases and balance transfers. After that the interest charge is 7.7% on purchases. But the rate for cash withdrawals is currently just 4.5% and is fixed at 4% above Bank Base Rate, making it currently the cheapest form of unsecured borrowing available apart from 0% balance transfers. Not many people know about this – Co-op has been very quiet about this very useful facility.
Can Osborne keep his bold promises on banking and credit cards? | Personal Investor | Citywire
