Proposed Changes To Credit Card Rules
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.
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