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Are we soon to see a change in minimum credit card payments?

Wednesday, 4th November 2015

To many people, well managed debt is an acceptable and perfectly normal part of everyday life.  However, for those that become ‘over indebted’, it can become a serious problem affecting their health, relationships and often their livelihood.

The FCA's interim review published yesterday has revealed that around two million cardholders are in arrears, another two million have persistent levels of debt cardholders may struggle to repay and a further 1.6 million are constantly making minimum repayments on their credit card. That's close to 6 million card holders who potentially have debt problems.   

Triggers for falling into debt

The main triggers for falling into debt are loss of employment, relationship breakdown, illness and pregnancy.  In addition, too many consumers get into financial difficulties because they want to acquire goods and services immediately but cannot afford to pay for them in full at the time of the purchase. So they turn to credit and in particular credit cards.

Morally and socially we have been encouraged to spend and pay later through slick marketing and the easy availability of credit.  From this we have developed a culture of must have now.  Consumers will not change their habits overnight so the regulator has identified some potential solutions with the aim of helping consumers who are having difficulties managing their credit card debt.

The unprofitable & profitable credit card customers

The FCA found that consumers in default are extremely unprofitable and credit card providers are active in contacting consumers who miss payments, triggering forbearance at this point.

However, consumers with persistent levels of debt or who make just the minimum payments are highly profitable to the credit card provider; therefore they have little, if any, incentives to help these customers.

So are we to see a change a change in minimum credit card payments?

The UK Cards Association who is a leading trade association for the card payments industry in the UK said on Twitter "­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­­We will work with FCA to identify ways we can build on our track record of providing support to those who find themselves in difficulties."

So it is now down to the regulator to act in a positive way following a much needed credit card review.

How credit card providers profit on minimum payments

There is no incentive for the credit card provider to intervene on minimum payments as it is a very good earner for them, just look at the following statistic by The Money Charity.

Total credit card debt in September 2015 was £62.7bn, equating to £2,349 per household.  For a card attracting the market average interest rate, it would take 25 years and 6 months to repay if only the minimum repayments are made each month. The minimum repayment in the first month would be £56, but reduces each month.

How many credit card borrowers know that if you instead maintained payments at a level of £56 every month, the debt would be cleared in around 5 years and 5 months? That’s a whopping 20 years shorter!

Related reading Nearly 6 million have 'concerning credit card debt' says regulator

 

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