This week has seen the government introduce proposals to change the way credit cards operate. Changes are proposed in the way payments are applied, what the minimum payments should be and preventing the credit card company raising credit limits without consulting customers first.

The changes suggested as to how payments are applied to the account mean that the most expensive portion of the debt should be paid off first. This is the complete opposite of what is currently normal practice whereby the lowest interest bearing debt is cleared first while the high debts continue to rack up interest for the credit card company. This is a sensible change of benefit to all consumers who use credit cards.

The raising of credit limits whenever the credit card company wants to has always been a controversial practice. Sometimes it may be helpful to a customer who has a temporary need of credit but it has often enabled people to get into more debt than they can comfortably manage because it was all too easy to use up the additional credit.
It would be no bad thing to require credit card companies to consult their customers before raising limits and inaction by the customer would, presumably, mean their credit limit would stay the same. This seems like another good proposal as anything that requires you to think about your financial situation has to be a positive thing, enabling people to better understand if they are using more credit than they can comfortably afford.

The proposed change in minimum payments is, at first glance, to be welcomed. Credit card debt is expensive debt and the longer it runs the more it costs you. Credit cards are not the right financial tools for long term debt and a personal loan is far cheaper and more suitable for that purpose. For new credit card debt I think this would be a good thing. I do have concerns that it could be bad for some people and actually make their financial situation worse.

For anyone who already has credit card debt and may be struggling to meet the current repayments, raising the minimum payment could be disastrous. It could lead to failure to pay the minimum payments which, in turn, would lead to additional charges and push these people into even greater debt with little hope of digging themselves out again.
It could ultimately lead to them ending up in bankruptcy if month after month they are unable to make their repayments. If this change is to be applied it would seem wiser to apply it to new credit card debt and leave old debts on the previous level.
Increased minimum payments on credit cards is a sensible move but should only apply to new debt or new credit cards to avoid making some consumers suffer even more from their spending in the past.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

We are all waking up to the new reality that we cannot assume that things will get bigger and better in a constant rising tide of success.

House prices do not go on marching upwards with no downside, stock markets do not only go up and executive bonuses do not always simply get bigger and bigger. We do seem to move in cycles and the current one is most definitely downwards.

Things will probably turn around once again and in a few years time we will have another generation that has never known house prices to drop or have ever seen a bear market and it will probably all happen once again.

We are creatures of habit and our enthusiasm and hopeful outlook always encourages us to see things getting better all the time. There are always some who warn of problems ahead but while the mood of the majority is positive things continue to go well. It’s only when the majority take the alternate view that things really start to change though that is in response to changes already occurring.

You can talk things up and you can talk things down but whichever way the swings are they are probably greater than is truly justified and everything averages out somewhere in the middle over the longer term.

As a country we have talked house prices up and borrowed heavily on the assumption that this was true wealth that we could afford to spend. The reality check we are experiencing proves us wrong in that assumption and we have all tended to become rather cautious about spending which is creating problems for businesses across the country.

It is a strange paradox but when people start behaving sensibly, by saving money, that is bad for the economy. If we don’t spend then businesses don’t make money and jobs are lost. The extremes of debt we allowed ourselves have led to extremes of caution which are now causing businesses to fail through lack of customers with money to spend.

If the government are serious about encouraging people to feel safe to spend again they need to do something to free up the most used source of credit for ordinary people and that is credit cards. The interest rates on credit that people have already used is a reminder of what a bad deal we get from the credit card companies. The bank rate is now 1.5% but credit card companies are still charging around 17% which seems outrageous. A rate of over ten times the bank rate just feels like a complete rip-off.

If the government really want to encourage consumers to spend they will need to tackle the credit card companies and force a reduction in the cost of using plastic. The alternative will be that we become a nation of savers and the businesses and the credit card companies will all lose out in the long term.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)

Once again we have a cut in interest rates and this one is significant in that it takes interest rates to the lowest level they have ever been in the 315 year history of the Bank Of England.

The cut of 0.5% reduces the official bank rate to just 1.5% a figure we have never seen before and one that takes us into new territory.

The cut will be welcome to mortgae holders who will now be paying less than they did at the start of the credit crunch but the banks are still being very cautious about lending to anyone and businesses and people looking for new mortgages are finding that money is still difficult to borrow.

The lowering of interest rates is intended to encourage consumers to start spending again but when you think that a large part of the consumers spending over recent years has been ramping up on their credit cards and credit cards are still charging typically around 16.9% when the bank rate was just 2% you can see how consumers have been ripped off in the past and are cautious about getting into further debt at such outrageous rates.

The average consumer doesn’t have a lot of money sitting around doing nothing. Most people live on each months money and at the moment that may only just cover the cost of living. I would definitely not encourage consumers to go out spending even more on their credit cards if they cannot comfortably afford repayments but at these ridiculous rates it is hard to see why anyone would choose to build up debts on a credit card.

We are going through a period of change and it will be difficult for many people but hopefully, when we do get through it, we will be in a new and more stable, sensible era where cash money is treated as an important item and credit cards are just a short term financial tool. Credit cards and not appropriate for long term credit and with the outrageous interest rates charged by the credit cards have made consumers into a cash cow for the credit card companies.

Money Magic: Seven Simple Steps to True Financial Freedom (Quick Reads)