Minimum credit card repayments should double, say MPs

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The proposals include forcing an increase - possibly by as much as 50% - in the cost of the smallest amount that must be repaid of a credit card agreement each month.

The plans follow a review into credit and store card practices conducted by ministers after the consumer white paper "A Better Deal for Consumers" first suggested a raft of measures in July.

Gordon Brown said that the proposals were aimed at making, "credit and store card companies clean up their act and give people a fairer deal."

"Sharp practices by lenders - such as hiking interest rates on existing debts without explanation and raising credit card limits without being asked - ...should end."

Turning the tide

Over the past few years the minimum repayment amounts for credit cards have fallen from a typical 5% of the outstanding balance to an average 2-3% of the outstanding debt.

Just last year, for example, Halifax announced that they were cutting their minimum payments in half to just 1% for most credit cardholders.

Those kind of small required repayments can quadruple the original credit card debt for those people who never pay off more than the minimum over a long period.

Customers who make only low monthly repayments for years have been known to end up spending longer paying off their credit card than their mortgage and the trap is thought to particularly affect the most vulnerable people.

Reducing the impact

Although debt on credit cards has fallen in the past year by £2bn, to £64bn, the Government believes card issuers should be doing more to ensure that customers are not hit by interest charges which often approach 20% p.a.

Kevin Brennan, the Consumer Minister, said that it is "astonishing that credit card companies were continuing with practices which work against the interests of consumers."

However, how far increasing the minimum monthly repayment amount actually does reduce the impact on consumers is a question that's up for debate.

Increasing such payments could leave consumers with the highest credit card debts reeling.

A change from 1% to 5% on a £8,000 debt, for example, means the minimum monthly repayment increasing from £80 a month to £400, more than many people's rent or mortgage payments.

As bad as making a small monthly repayment is, defaulting on a debt altogether is much worse.

These concerns are highly likely to form part of the debate on any proposed statutory changes to minimum repayments and, in particular, become a focus of the financial service industry's contribution to the debate.

Smaller minimum repayments are, not coincidentally, also in their interest.

More upcoming proposals

Other recommendations due to be made in the Government's big personal finance announcement tomorrow include a ban on credit card companies increasing a customer's borrowing limit without consulting them first.

Many MPs also support the introduction of an annual statement to allow cardholders to see how much interest they have been charged over the year since its thought that monthly statements can give a misleading impression of the total cost of revolving credit.

The Government will take the proposals into public consultation for a three month period following the announcement.