MoneySavingExpert is saying "No" to increasing credit card minimum repayments in our submission to the Government's consultation to stop stealth charges on plastic.
Whitehall's 'Review of the Regulation of Credit and Store Cards', which closes today, is aimed at tackling four key areas of consumer detriment that often see those already in hardship lumbered with even more debt.
These are low minimum payments, the often unfair way payments are allocated, unsolicited credit limit increases and rate hikes.
Once all submissions from the industry, consumer groups and the public are received by close of play today, the Government will consider what action to take. If tough measures are required, they may not be implemented until next year.
Below is a summary of our response. You can also read the full MSE submission and lenders' response.
- NO to increased minimum repayments. Forcing an increase would leave many defaulting on their bills. In addition, those repaying multiple cards benefit from lower repayments as they need to focus their money on clearing just one expensive card.
Our preferred two-pronged solution is a huge warning on monthly statements informing borrowers exactly how long and how expensive it would be to repay the debt using the minimum payment only, such as stating: "Typically, a £3,000 debt at 17.9% takes 41 years and costs £6,300 in interest."
Plus, there should be enforced, standard repayment options including a new 'recommended repayment level' to clear debt within 3 years (see the Minimum repayments guide).
- Allocation of repayments must be proportionate. Lenders make hundreds extra a year per customer by allocating repayments to clearing cheap credit card debts (eg, balance transfers) ahead of expensive ones (eg. withdrawing cash), locking the costlier debt in. Consumers must receive big and bold warnings about this cost, and repayments should be allocated proportionally to the size of the debt.
- NO to unsolicited credit limit increases. Lenders should never dole out credit without asking. Consumers should either be able to set a maximum limit, or lenders must write to offer increases which borrowers can then accept or reject.
- Rate rise rejection powers strengthened. Since Jan 2009, if lenders hike existing customers' interest rates, consumers are simply told that they can cancel the card. In fact, the rules are more powerful; they can reject rate rises as long as they don't spend any more on the card. Yet this has been communicated woefully.
To make this work properly, it's crucial lenders explain why rates have been increased, and they should make it clear you can complain to the Financial Ombudsman if you think it's been done unfairly (see the Reject credit card hikes guide).
Martin Lewis, MoneySavingExpert.com creator, says: "Credit card stealth charges have been around for years, yet if the Government can deliver on its plans. I've real hope the twin nasties of minimum repayments and allocation of payments may be tackled.
"However, we need to be careful that whilst improving the way these operate we don't kill the balance transfer deals many rely on to keep their existing debts affordable."
Further reading/Key Links
Full info: MSE submission
Avoid credit card trap: Danger! Minimum repayments
Cut credit card debt: Best balance transfers
Say no to interest rate rises: Reject credit card hikes