Will credit card reforms help or hinder consumers?

As part of its overhaul of the financial sector the government has recently announced a number of changes to credit card regulations, and these changes could have a profound impact on consumers. However, whilst the new regulations were brought in to try and make things easier and fairer for consumers there are concerns amongst some people that these regulations could actually end up tipping consumers over the edge financially.

Consumer groups have spoken out over the regulatory changes that have been proposed, and whilst some of the changes have been widely welcomed by campaign groups and consumers there are some changes that are giving cause for concern. One of the changes that has been proposed as part of these reforms relates to the minimum repayment.

At present around 11 percent of credit card holders make only the minimum repayment on their credit card balances each month, and under the new proposals the amount or level of the minimum repayment would be increased.

Of course, there are many benefits to having the minimum repayment increased, as it means that the cardholders would get themselves out of debt far more quickly and would also pay far less interest on their debt.
However, there are concerns that in the current financial climate where people are already struggling to make ends meet in many cases some people could find that the increase on the minimum repayment tips them over the edge financially and leads to them being unable to meet their financial commitments.

Currently the minimum repayment level set by most lenders is 2 percent of the balance, and under the reforms this may need to be increased to 5 percent, which would be a sharp increase for many people that are already struggling with their finances.

One industry official said: “For customers already struggling to meet repayments, an increase in how much they are required to pay each month could tip them over the edge. More measures would need to be put in place to stop these customers getting further into debt.”

One of the proposed reforms that is receiving a lot of support is that which would see card providers allocating repayments from consumers to the most expensive debt first rather than the other way around, which could help the consumer to save a fortune in interest.

One official said: “It is basic financial common sense that you repay your most expensive borrowing first and the cheapest last, yet the majority of the card industry gives its customers no choice but to do the complete opposite.”

One official from the UK card payments association APACS said: “These proposals risk disadvantaging more customers than they protect.”

A campaign official from Which? said: “It’s wrong for card companies to entice people into spending more money than they can afford. Anyone who wants or needs more credit just has to contact their card provider and ask for it.”

Tags: apacs, credit card changes, credit card reforms, Credit Cards, which?