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Credit Card Companies
   
    The Government has recently declared they want to clamp down on the less desirable practises of the credit card companies. 
  1. They are to raise the amount of the minimum monthly repayment you can get away with. 
  2. They are to stop the practise of the card company raising your credit limit without your prior consent.
  3. They are to change how the card company allocates the payment you make to your outstanding balance.
    BEFORE you start cheering the Government, their actions are NOTHING to do with fair play, all the above are designed to make you repay sooner, stopping you increasing your debt too easily and limiting the amount of debt increase per borrower caused by maximising the interest card companies charge by unfair allocation practises. For instance, in point 1, the usual minimum repayment per month is £5. Should this be increased to £25, the total amount owed on all our credit cards will be reduced by 5 times as much per month as a £5 payment would produce. Now, in point 2, say a woman with 3 kids is told by her husband that he is now redundant (a common story these days). She has a card with a £1000 limit and she owes nothing because she paid any purchases off in total every month. With her new financial circumstances she may spend £200 a month on her card to buy food, making only the minimum repayment per month "just until things get better". After the first month she now owes £195, month 2 it is now £390 and on it goes. When she hits the £1000 limit, it is the usual practise of the card company to raise her limit to £1500 or £2000 AUTOMATICALLY and without her consent. Under her current circumstances this is a lifeline BUT she will soon be in a position where the monthly interest is GREATER than her repayment amount so the debt increases by how much she spends PLUS all the extra interest! She is soon in misery and not knowing which way to turn. Finally, in point 3, there are roughly 3 bands of interest charged by card companies. Firstly there is the special offer 0%, usually applied to amounts you transfer from 1 card to another when you switch card company. Then there is the standard rate which is 15.9% to 17.9%. Then there is the rate for withdrawing cash or issuing a credit card cheque which is 2.5% EXTRA, so is a premium interest rate. As interest is calculated and applied on a DAILY basis, you can see how quickly the debt mounts up. Lets say you have a card with £500 of cash withdrawal, £500 of transfer at 0% and £500 of purchases and they were debts run up in that order. If you make a £100 payment, you would ASSUME that the payment be allocated to the oldest debt, well it is NOT! It will be applied to the transfer. In this way the card company MAXIMISES the amount of interest they can charge you and this means that the total owed to the card companies increases by some extra millions of pounds every month!

    If fair play was the motivation for the Government, they would also STOP the card companies increasing your interest rate when you are in quite some debt. A good friend of CB's is a man who is very careful with money, He has a Virgin Money credit card which, like many well known cards, is administered by a company in Cheshire called MBNA Europe. Now this man uses his card regularly but pays it off in total every month and, therefore, never pays interest. He does know that this earns him a "second class customer" rating on the card companys system, so to avoid this, every year he buys his Christmas extras on the card and pays only half of it off in January. He settles his February bill in full so he has incurred about £3 in interest but he is not now a second class customer.

    Card companys levy a charge on all those who supply you and let you pay by their card. If you use your card frequently and pay interest every month, they earn twice from every one of your transactions, so you are a first class customer. If you use your card frequently, pay it off in full, thus never paying interest, they earn once per transaction from you so you are a second class customer. Getting back to CB's friend, he recently needed some replacement household items which amounted to a big spend (for him). He calculated that, at 16.9%, and over 6 months he would pay some interest but it was an acceptable amount so he went ahead. Within 3 months of the spend MBNA wrote to him advising his interest rate was to be 26.9% from the beginning of next month. If he didn't agree to the increase he must stop using the card and settle his account. Talk about moving the goalposts in the middle of the game! In America the Supreme Court might consider this to be RACKETEERING which earns a 20 years gaol term. It certainly feels like theft by stealth but CB supposes it would be seen to be fair practise in the age of scam and sleaze which we now live in. CB thinks that as many of you as possible should move your card to ANY NON MBNA source to protect your pockets. What about the Government? Would they care to say why they didn't address this type of card rip off? CB thinks not, this current Government is renowned for looking after its own interests, never mind the people, never tell us what they are REALLY trying to achieve, never FULLY explain anything and NEVER answer a question! Perhaps, in the age of scam and sleaze, companys who operate this way are taking their lead from the Government.
 




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© The JSC Group March 2006