The credit card companies have said today that they'd like to reform the biggest credit card rip-off of them all - negative payment hierarchy. This is where the card companies allocate repayments to the cheapest debt first.
The UK Cards Association said today it would like to change industry practice so that 'all payments above the minimum payment are allocated to the most expensive debt first (the minimum payment being allocated at the lender's discretion.)'
This is a welcome move, but let's be clear, the industry hasn't done this out of the kindness of its heart. The government launched a review of the credit card market last year and said that it wanted to ban negative payment hierarchy outright - the writing was clearly on the wall.
So it's not surprising that the industry's submission to the review responds to that. It's just a shame that the UK Cards Association has only gone 80% of the way towards a ban. Instead of supporting a total ban on negative payment hierarchy, the association says that banks should be able allocate the minimum payment to the cheapest debt. Only payments above the minimum payment will have to go to the most expensive debt.
No doubt the card companies hope that this compromise proposal will enable them to make a bit more money from extortionate interest rates. But there's another problem with the card companies' proposal. It will be confusing for the consumer. The financial services industry loves to confuse the consumer because if the consumer doesn't understand what's going on, it's easier for the banks to rip him off.
Minimum payments
If you only ever make the minimum payment on a credit card, it'll take you years and years to pay off your debt.
The Cards Association's solution is to say that card companies should write to consumers who repeatedly only make the minimum payment and highlight the dangers of that course.
That's fine as far as it goes, but I think there should be a statutory minimum on this. The minimum payment should never be less than 5% of the outstanding debt. The only exception to this should be if a customer has told the card company that he/she is in financial difficulties and needs help. In that circumstance a card company might agree to stop charging interest and implement a delayed repayment schedule.
But for normal customers, the government should push through a 5% statutory minimum repayment.
Election
One of my biggest concerns on this is that the election will muck things up. In other words, the current government might introduce legislation but not have enough time before the election to get it passed. Then after the election, the new government might have other priorities so it could be a while before any credit card reforms pass into law.
Let's just hope I'm wrong and the politicians get on with it.....