In an effort to stop credit card debts spiralling out of control, card holders could be forced to double their monthly payments according to government recommendations.
This week, consumer affairs minister Kevin Brennan is set to announce the results from his research into credit and store card practices, and it is predicted that the minimum monthly repayment will feature prominently in his findings.
Over the number of years minimum repayments on store card and credit card debts have fallen from around 5% of the outstanding balance to an average of between 2 and 3% of the outstanding credit card debt. This difference, whilst seemingly small, can quadruple the original credit card debt for those people who only pay the minimum amount over a long period.
The government doesn’t believe that enough is being done by lenders to prevent debt problems developing, following spending on plastic, and intends to introduce legislation to help the debt management of those consumers currently struggling.
Other areas subject to changes include the adverse order of repayments, currently applied by the majority of card issuers.
People who have developed credit card debts are frequently hit with hundreds of pounds of extra interest costs, because lenders force them to pay off their cheapest debts first.
“Adverse order” is the way that lenders allow you to pay off cheapest debts first, thus letting more expensive ones last longer and earn extra interest revenues.
According to figures from Nationwide building society, this practice means consumers now overpay an estimated £500m every year.
A spokesperson for Nationwide said: “This is an issue that affects people in different ways but it has the biggest impact on the most vulnerable.
“It would not be good financial advice to tell someone who was trying to manage their unsecured debts to repay their cheapest debt first – but this is what most credit card providers do.”
Ivan Cooper, Chairman at debt advice specialists Chiltern, said: “These steps proposed by the government should help prevent people developing debt problems in future, but more needs to be done to help those who already need help with debts.
“People need to understand that there is free debt advice available and that dealing with debt problems sooner usually results in a more positive outcome.”
Other measures to help consumers avoid developing potential debt problems include preventing firms from raising interest rates on existing credit card debts and preventing them from raising someone’s spending limit without authority.
