If Cliff D'Arcy was running for parliament this election, the first thing he'd do would be to clean up these five dangerous credit card rip-offs....
As the countdown to the General Election on 6 May continues, politicians of all parties are queuing up to promise voters their heart’s desire. Alas, the problem is that there’s nothing in the tank with which to fund these post-election bribes.
As I warned last week in How your vote could make you richer, the £167 billion black hole at the heart of our economy leaves no room for extra spending. Indeed, tax hikes and spending cuts will be the order of the day after the election.
Five ways to clean up credit cards
Then again, Liberal Democrat leader Nick Clegg announced last Friday that his party would introduce legislation to ban rip-off charges for unapproved overdrafts, outlaw sky-high interest rates on credit cards and store cards, and ban the countless additional fees charged by budget airlines.
In similar fashion, here are five proposals which would make their sponsoring MP very popular, yet cost HM Treasury almost nothing in return. Though my new laws would make Britain’s 30 million credit card users much better off, the only real losers would be the lenders that have been ripping us off for years...
1. Sky-high interest rates
Since March 2009, the Bank of England’s base rate has remained at a record low of 0.5% a year. Meanwhile, the interest rates paid by credit-card borrowers have been climbing. In fact, the average rate charged on card purchases has hit a 12-year high of 18.8% APR.
Frankly, British borrowers are fed up with being ripped off, and we want action now. So here at lovemoney.com, we also demand a law to limit the maximum interest rate charged by credit cards. I reckon base rate plus ten percentage points should be enough for lenders to make a decent living.
In the meantime, why tolerate swindling interest rates, when you can freeze your interest bill using a 0% balance transfer? Alternatively, try a lifetime balance transfer card – the Halifax Easy Rate MasterCard allows you to pay off your debt at 6.9% (variable), and you don’t even have to pay a transfer fee.
2. Unfair penalty charges
Nick Clegg also attacked the ridiculous charges -- approaching £40 a time -- which banks and building societies levy on customers that exceed their overdraft limits without permission or ‘bounce’ payments. Nice one, Nick, but I can do better.
Although similar penalty charges for credit and store cards are capped at £12 a time, I firmly believe that this is too generous to the banks. From my decades in financial services, I know that the true cost of exceeding your credit-card limit is closer to £2 than £12. Hence, I’d cap this charge at, say, £5, with no fine for first-time offenders.
By the way, if you’re sick of being shafted by your bank, then it’s easy to switch to a Best Buy current account! Or use our online banking tool to keep track of all your transactions with different banks and credit cards, throughout the month.
3. Foreign-currency commissions
Be very wary when using a debit or credit card abroad, because all but a few plastic cards will penalise you for doing this. Indeed, 99% of the time, you’ll pay a ‘foreign-currency loading fee’ of around 3% of your spending. This charge also applies to non-sterling purchases made online and, for example, adds £30 to £1,000 of overseas spending.
Were I an MP, I would enact a law to cut this charge by two-thirds, capping it at a mere 1%. I reckon that, based on our £27.8 billion of overseas spending in 2008, my 1% cap would save Brits at least £556 million a year.
To dodge this rip-off charge when abroad, take a Best Buy credit card from the Post Office, Santander or Nationwide BS. Alternatively, get the Lloyds TSB Airmiles Duo, which gives you double reward points when you spend abroad – o at least then you’ll get rewarded as well as penalised for your spending.
4. Minimum monthly repayments
Back in the late Eighties, all credit-card issuers required borrowers to pay a minimum monthly repayment (MMR) of 10% of their outstanding balance. However, as competition hotted up in the Nineties, these MMRs were whittled down: first to 5%, then 4% and ever-lower.
Today, minimum monthly repayments as low as 1.5% are routinely applied to card accounts. Of course, very low MMRs mean shockingly high interest bills, condemning unwary users to decades in debt.
My solution to this problem is simple: for all interest-bearing accounts (excluding 0% cards), the minimum monthly repayment must be at least 5%. This may come as a shock to some heavily indebted borrowers, but paying higher MMRs will make them far better off in the long run.
You can beat this trick with an interest-free debt transfer.
5. Credit Card Repayment Protection (CCRP)
Lastly, I nominate Credit Card Repayment Protection as the biggest card rip-off of all. CCRP is optional insurance which pays off your card debt if you die, plus pays monthly benefits if you are unable to work due to an accident, sickness or unemployment.
As I warned in Beware this £1 billion credit card rip-off, CCRP is a colossal con. In fact, we’re paying about five times as much for this insurance cover as we should. That’s a swindle -- and the way to stop it is to place a legal limit on the staggering commissions and profits built into this cover.
As a leading expert on CCRP, I calculate that a ‘commission/profit cap’ of 20% of each premium would be more than enough for card issuers and insurers to live on. I estimate that this would save British credit-card issuers at least £600 million a year, while teaching CCRP providers a lesson about taking the public for a ride.
Finally, I’d be delighted to hear what you would include in your election manifesto as a ‘consumer champion’ candidate. Also, what have I missed? Please post your comments in the box below...
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