Introduction - in the United Kingdom we have a love hate relationship with our credit cards, spending one of the highest amounts per head, than any other country in the world. The convenience and ease of use and acceptance by retail shops and online stores, makes credit cards our number one credit choice for our everyday busy lifestyles. The lure of free credit for one to two months, has fuelled a personal debt boom over the last decade. Credit cards are seen as the shopaholics 'flexible friend',leading many people to rack up huge personal doubts using multiple credit cards from multiple providers. By March 2008, outstanding credit card debts in United Kingdom was £64.1 billion and an astonishing and the proportion of balances bearing interest was an astonishing 74%. There were 162 million monthly transactions on credit cards with a value of £12.3 billion. And there are incredible 57.9 million active credit card accounts with outstanding balances in the UK. Amazingly, only 50% of cardholders pay off the outstanding balances at the end of each month. This may be because the forget to pay the bill, choose to only pay some of it off or simply can't afford to pay the debt. This article aims to provide credit card debt help information to improve borrowers understanding of features of credit cards, their history, charges, benefits and pitfalls....
What is a Credit Card? - a credit card simply another means of borrowing and a method of payment. They can be obtained from any bank, building society and some high street shops. These organisations are known as the 'card issuer'. Once an account has been approved by the credit provider, the cardholder can make purchases at any merchant accepts that particular card. Card Issuers will lend money to the consumer and agree an individual a credit limit, which will be the maximum a maximum amount of money that can be spent on the card. The user can then spend this money with an approved merchant. Credit Cards give people the freedom to buy things they didn't think they can afford, and worry about repaying the credit card debt at a later date. Card Issuers must be licensed by the office of fair trading, under the consumer credit act 1974. This provides statutory protection for the consumer and means that the credit agreements, signed by the applicant must meet statutory specifics. Once the credit limit has been reached, the card will not work any more. Not everyone has a credit card, but they seem to be a cultural necessity in today's modern society. The explosion of e-commerce on the Internet, the introduction of Chip and pin in virtually all retail outlets and the elimination of the old-fashioned check system, is making credit and debit cards the preferred method of convenient credit. Credit cards are not all bad, they provide the consumer with statutory rights against rogue retailers who fail to deliver goods or goods that have been damaged in transit. They may also provide additional benefits such as free travel insurance & provide additional insurances.
Credit Card Interest Rates - card companies charge various types of interest calculations on the outstanding balances each month. Most offer a fixed number of interest-free days usually between 40 and 60. Any balance is that is not clear at the end of that period will be charged at their published interest rate. They are different from Charge Cards (where the balance must be settled at the end of each month). Charge Cards are an excellent way of keeping track of expenses and managing cashflow, for large businesses where its employees require sundry expenses. With a credit card, the minimum balance outstanding that must be settled by the holder is usually dated on the monthly credit card statement. Once the statement is received, a minimum payment is usually required within a set number of days, as well as the full balance. Other companies may apply an interest rate to the borrowed account balance, very shortly after the statement is sent. Most credit card companies make the greatest proportion of their money from late penalty charges incurred when people forget to pay their credit cards off before the interest-free date. In addition, the rate of interest is relatively high compared to other forms of unsecured borrowing.
Credit Card Statements - on the credit card statement people need to read the various headings and understand their meanings. The amount of 'available credit' is the difference between the credit limit and the amount the user has spent on the statement date. Any purchases made after the credit card statement was dated and posted will not appear on the statement and the borrower should take this into consideration when budgeting ahead. Any 'balance transfers' will be highlighted separately which are borrowings from competitive card companies. They have enticed borrowers to switch by providing an interest-free period of up to 18 months. The 'cash limit' is the maximum the user is allowed to take out from cash machines using the card. The 'credit limit' is the total amount of credit the cardholder is allowed to spend on the card. The 'cash annual rate' is the interest rate which applies to withdrawals from ATM cash machines and this rate is usually relative key high. The 'minimum payment' is the amount of money the card company must receive on the outstanding balance each month. Nearly all credit card companies demand a 'minimum repayment' of 2% of the outstanding credit card debt, to be repaid each month. The 'Annual Percentage Rate' is the interest on the credit card statement and is usually expressed as an APR or annual percentage rate. This is simply the overall borrowing costs for monies owed on the card.
Credit Surfing - by switching credit cards between credit card companies, the outstanding balance can be moved. Typically credit card companies offer a six monthly introductory rate of zero or low interest for a period of six months. The downside to this strategy is that the balance is never reduced and is more likely to increase and the temptation of more credit facility is a stones throw away. It is a good idea to keep records of transfers and outstanding balances so that the previous credit card company challenges whether they are still owned any monies, there is no doubt the full balance was moved.
Introductory Offers - when consumers change their provider by transferring balances there is usually a headline grabbing offer such as a '0% balance transfer' or perhaps some kind of '1% cash back on purchases' type offer. Typically however, when an introductory offer ends, the holder will usually be automatically reverted back to the standard terms and conditions of the credit card company. Consumers sometimes don't bother to read the small print, of these terms and conditions. As a result, they may incur higher than expected penalty charges for any late payments.
Late penalty Payment Charges - this is an area in which car companies have profited hugely over the last decade. Reviews by the office of fair trading (OFT), were initiated in response to the headline grabbing articles surrounding penalty charges incurred by millions of cardholders. Card companies argued that late payment charges were method to motivate people to reduce their credit card debt in a timely fashion. Critics argued the opposite in that it was pure profiteering and a simple means of extracting more profit per cardholder. As a result of the investigation, card companies late penalty charge is now capped at £!2. Approximately 20% of all users incur late penalty charges in the UK. The ruling is related to one specific area of charging and has allowed and motivated credit card companies to look for other ways to charge holders.
Chip and Pin - in order to reduce risk of identity theft and speed up the efficiency of using in a retail outlets, each cardholder is allocated a private 'chip and pin' card with their own unique four digit personal identification number. It must be entered into the retailer's point of sale machine every time a transaction is made. This number is obviously secret and must never be shared with anyone. Rapid advancements in technology mean that users can also pay for things such as cinema tickets, simply by using voice activation, in response to security questions from the merchants call centre computer. Prior to the chip and pin system be introduced, customers had to swipe cards through a magnetic reader and were asked to sign the counter slip by the merchant. By comparing signatures, the merchant could approve the sale of goods or services. This system had obvious security flaws such as cards lost or stolen and the signature could be faked by criminals. For instance, aggressive direct marketing by card companies sometimes landed on the doorstep of the unintended prospect customer (in situations where they moved property and forgot to inform their card company). This accidentally passed on personal financial details to potential fraudsters. Another scam was when a dishonest employee 'skimmed' the old style cards using a magnetic reader and took copies of the signature. By selling this information on it was possible to clone the cards. By replacing this flawed signatory based system with new digital chip and pin system, credit card companies have been able to reduce the level of credit card fraud. In addition, the explosion of online fraud due to the popularity of e-commerce, forced the introduction of the 3D protocol. This protocol prompts customers too identify a new three digit security code, printed on the back of their card. This is particularly relevant where customs are using the telephone to buy something or shopping online.
Chargeback - achargeback is a reversal of a normal transaction, and normally occurs when the customer complains to their provider. Typically, the consumer will find a fraudulent or unexpected item on their statement. Alternately, they ordered goods which the merchant never delivered or were incorrect or broken. In the types of situations, the card issuer usually refunds the money to card holder and passes this cost on to the merchant. This policy motivates the merchant to behave properly to minimise costly mistakes as well as gives the user confidence that they are protected when they buy things using the card. An example would be where a consumer books their annual holiday using their card with an airline or holiday company, who at a later date unexpectedly go to company administration and cannot provide the holiday to the consumer.
Impact of Credit Crunch on Credit Card Debt - prior to the liquidity crisis, card companies offered '0% transfer balance' deals and other financial incentives such as cash back, air miles and points in order to attract new customers. However, the with the onset of the credit crunch, credit card availability has reduced, both in terms of applicant's ability to obtain high levels of card companies desire to attract borrowers from competitors. Card companies have now started charging for balance transfers in order to discourage the practice of 'switching'. They pay particular attention to credit scoring and the applicants situation. Every time an individual applies to switch, it is noted on their credit history report. The more times and applies for additional credit the more times it will be noted that this will be viewed by other providers who may begin to see a pattern emerging half switching and extending borrowing beyond their means.
Payment Protection Insurance - payment protection insurance (PPI), is a controversial area which is designed to settle an outstanding credit card balance,if the holder becomes unemployed or sick. There are similar insurances covering loans and mortgages. The credit card provider adds on an additional margin on top of the insurance cost provided from the insurer. This equates to an extremely expensive and uncompetitive cover for the cardholder, which might have been obtained if they bothered to shop around. The terms have been notoriously complicated and the payouts by companies controversial, depending upon individuals situations. Industry analysts have branded protection insurance as a means of 'profiteering' which provides very little benefit to ordinary card holders.
Avoiding Junk Mail - swathes of the Amazon rainforest have been chopped down producing junk mail offers and other unsolicited mail offering new credit cards and switching deals. It is possible to remove yourself from this nuisance by applying to the Mailing Preference Service, BMA house, 17 Margaret St, London W1WHSS this will assist and reduce the amount of direct mail. Unfortunately the MPS only covers personalised junk mail and car companies get round this by addressing it to "occupy/homeowner".
Identity Theft - one of the fastest growing crimes in UK is identity theft. One of the favourites for criminals is spending on someone else's credit card. . By obtaining an individual's pension insurance number, name and address, personal bank account details and other relevant financial personal information, criminals are managing to clone credit cards and spend other people's money. The new chip and pin system replaced the signatory system and was designed to reduce credit card fraud by stopping thieves stealing the card and all cloning it.
Store Cards - a store card allows the holder to spend an agreed credit limit within a specific shop or chain of shops. They have similar characteristics to credit cards, in that there is an interest-free period after which a high interest rate is usually charged. They are popular in most retail chain high street department stores. When a customer is at a checkout in buying mode, the assistant is usually incentivised to offer the customer an application for a store card. Shops use store cards to encourage customer loyalty and convenience shopping, using associated discounting and other incentives. The card is easy-to-use and provide monthly statements to the user. Several investigations by the UK training authorities regarding the astronomical interest rates charged by stores, house provided negative media coverage. Typically busy shoppers would not bother to check the small print after just purchasing an item and signing up for a store card in the actual store.
Prepayment Cards - prepayment cards are alternative to a bank account or a credit card. Employers can transfer cash from their weekly or monthly wages to 'charge up' the prepaid card. Alternatively parents of students with credit card debt, can provide prepaid cards to assist with their financial difficulties. These prepaid cards can then be used in shops and other outlets in the normal way. Users of such cards are not provided any credit on the card, they are simply transposing their cash wages into a convenient form of electronic spending. They cannot spend more money than the card had been charged up by. This prevents the temptation to go on a spending spree.