Member Advice on Credit Cards & Loans

Credit Card Debt

Spiralling Out of Control

First some hard facts:
■ Every 4 minutes, the total personal debt in the UK has increased by £1,000,000.
■ In 2004 the Bank of England reported the largest ever single-year increase in debt (£116 billion) since it was founded in 1694.
■ Since the year 2000, Britain's total credit card debt has increased by 76%.
■ 76% of all ...
...■ 66% of British adults hold at least one credit card. 10% of these have at least 5 cards.
■ 15% of 18-24 year-olds believe that an ISA (or Individual Savings Account) is an iPod accessory, and, incredibly, 10% think it's an energy drink.
■ Youngsters under the age of 25 are the fastest growing group of people needing to seek advice from the Consumer Credit Counselling Service (CCCS), due to uncontrollable debts, with ... more

Credit Card Debt

Spiralling Out of Control

First some hard facts:
■ Every 4 minutes, the total personal debt in the UK has increased by £1,000,000.
■ In 2004 the Bank of England reported the largest ever single-year increase in debt (£116 billion) since it was founded in 1694.
■ Since the year 2000, Britain's total credit card debt has increased by 76%.
■ 76% of all credit card balances in the UK are accruing interest.
■ 66% of British adults hold at least one credit card. 10% of these have at least 5 cards.
■ 15% of 18-24 year-olds believe that an ISA (or Individual Savings Account) is an iPod accessory, and, incredibly, 10% think it's an energy drink.
■ Youngsters under the age of 25 are the fastest growing group of people needing to seek advice from the Consumer Credit Counselling Service (CCCS), due to uncontrollable debts, with the average debt for under 25's being £15,000.

[Data sourced from www.creditaction.org.uk/debtstats.htm]

WHY I'VE GOT A BEE IN MY BONNET ABOUT CREDIT CARDS

My first proper job after leaving university in 1995 was with GE Capital Retail Finance, the company behind all the major store cards offered by the likes of Top Shop, New Look, Debenhams and even Harrods. I had a credit card myself, a Barclaycard, and I owed about £1000- I was up to my credit limit, in fact. I knew very little about debt, credit cards, APR's or credit limits before I started working for GE, and I wasn't in the least bit worried about, (or interested in), my own debt, since I never read the statements.

I worked in the customer services department for about 18 months, and spent all day every day answering calls about everything from balance enquiries to change of address requests. These were the good old days, before the dreaded automated answering service was brought in, and certainly before 24/7 phone lines.

A few months after I started, GE introduced an aggressive marketing campaign, targeting the 18-25 age group. They instructed the shop assistants in stores most frequently visited by this age group, (i.e. New Look and Top Shop and others, rather than Deb's or Harrods), to approach customers, offering them a 10% discount if they opened up an account there and then. Some kind of ID was produced (a major bank card would be fine, madam), a form filled in, a phone call made by the shop assistant to GE, and as long as there was no dodgy credit record already lurking in the individual's murky past, the 10% was knocked off and the customer went away happy, spangly new dress in hand. The whole process would take no more than about 10 minutes. The staff were offered incentives to try and flog as many credit accounts as possible, (naturally; after all, business is business). In practice though, many young customers, (predominantly girls), were duped into opening accounts they didn't need, didn't want and in many cases, didn't even REALISE they had! How?, you may well ask. Well let me show you, by improvising a scene:

Shop Ass.- Hello there- that's a lovely blue isn't it. Bet you'd like 10% off that wouldn't you?
Girl- You bet!
Shop Ass.- Well, if you fill in this form, -it'll only take a sec- you can get 10% off, then you could buy these trousers too, which'd go lovely, dontcha think?
Girl- Great- where do I sign?
Shop Ass.- Just here. Ooh that's lovely. Ok, I'm just going to run your details through the computer- won't be a sec. Could I have your bank card? Ta. Why dontcha have a look at these scarves- new in today you know!
Girl- It's not a credit card is it?
Shop Ass.- What?! No!!! Just to get the 10% like. [Thinks to self, well, it's a Store card, not a Credit card, so I'm not lying…..] [Makes call to GE,]

2 minutes later….
Shop Ass.- Here we are! So you'll take the spangly dress, the trousers and the scarf then, lovely, minus the 10% that's £45.89- here's your card back, and your receipt. Have a nice day! Byeee!

Then, about a month an a half later, the girl will get her first credit card bill through the letter box. She thinks to herself- what the hell's this? I've already paid for these things- and I remember handing my bank card over, and anyway it was AGES ago. Must be a mistake. File in bin.

Another month, another bill, plus a charge for non-payment. File in bin, again. They'll give up soon.

Another month, an aggressive letter threatening legal action, and a whopping £25 charge for the privilege of receiving the letter.

At this point, the girl would phone me, or someone like me, in the customer services dept. (Or they might leave it even longer, preferring to ignore what is getting to be an increasingly worrying situation.) Two or three months after this promotion started, the first calls started coming in. I had to deal with 18-year-olds crying to me on the phone that the bailiffs were threatening to come and take mum and dad's furniture because of a Top Shop skirt that had cost ten quid 6 months ago, but was now costing something like £100. The situation got worse and worse, until I decided that I was totally against the company I was working for on moral grounds, and I wanted to leave. (I took the opportunity to train as a teacher, but that's another story!). I also decided to have a closer look at my own debt situation, and educate myself about the sordid world of credit debt, and I'd like to share some of my thoughts with you.

WHY CREDIT CARDS STINK
□ Apart from the dubious marketing practices mentioned above, the main problem with credit cards is the interest rate. The current average interest rate (according to www.creditaction.org.uk) is 15.75%, which is 11% higher than the rate of inflation. This is an APR (Annual Percentage Rate) which means that if you owe £100 for 12 months, you'll put about £15.75 into the pockets of your credit card provider; if you owe £1000 you'll pay them £157.50 a year- ouch. Card providers often quote their interest rates as monthly percentages, which can be misleading, since the figure is a lot lower and you also pay interest on the interest! This is known as compound interest. 1.5% a month equates to 19.6% APR, for example. (Not 1.5x12, which is 18).

□ If you choose to make the minimum payment each month, you'll pay between 2 and 5 % of your balance. In reality this means you'll hardly make a dent in your debt repayment. Example: You owe £1000. Each month you pay the minimum 2.5%, and the interest (let's say APR 15%) is added on. At this rate it will take you just over 15 years to pay off, and you will have lost £878 in interest alone. If your debt is £10,000, it will take you 30 and a half years and will cost you £9878 in interest payments alone. The total amount you'll pay to the company will therefore be £19,878. You can work out how long it will take for yourself at:
http://www.angelfire.com/d20/debtzapper/calculator.html
This calculator is in dollars, but if you pretend it's pounds you'll get the right result.

□ They charge you different rates of interest for different uses of the card. If you try and use your card in a cash machine or for a cash advance, you will probably find yourself paying around 20-25% APR.

□ As soon as you pay off your balance, they'll offer you a credit limit increase. Of course! Having lost you as a valuable customer, they need to woo you back.

□ Watch out too for credit card companies that scour changes in the electoral roll, and then send targeted mailings along the lines of - "You've just moved house! You must have lots of repairs to fork our for- how about our credit card?!" Or - "You've just got married- you must be totally skint now- how about a credit card just to consolidate your debts???" They hit people at their lowest, and that stinks.

□ CCJ's (or County Court Judgments) are basically black marks against your name, and you'll eventually get one if you don't pay your credit card bill. They stay on your file (held at www.experian.co.uk ) for 6 years, and will prevent you from borrowing money for serious things like mortgages, overdrafts and car loans. You'll also not be able to get credit from anyone else, apart from sharks who specialise in people with CCJs.

□ UK store cards are notorious for having the highest interest rates on the planet. Some of them charge up to 30% APR.

□ Money related arguments make up for 44% of family squabbles, according to www.creditaction.org.uk. Credit cards, therefore, can be bad for your sex-life, and that's BAD.

HOW YOU CAN PLAY THE CREDIT CARD GAME
□ Choose cards which offer a 0% introductory offer. Make a careful note of the conditions of this offer (usually the 0% will only be for a balance transfer from another card, not for a purchase), and transfer your debt somewhere else when the offer has ended. On the day of writing, the following cards are offering 0% deals for balance transfers:
Virgin Money (+2% fee) www.uk.virginmoney.com
Sony Card (+2% fee) www.sonycard.co.uk
MBNA (+2% fee) www.mbna-card.co.uk
and
Marbles (+2% fee) www.marbles.com
All of these cards have a normal 15.0% APR, outside of the introductory offer, except Marbles which has 12.9% APR.

You can check out the latest good deals at www.fool.co.uk . The first 0% card was Egg, in 2000. The offers these days are less attractive, with fees attached, but they are still definitely worth seeking out.

If you don't know how to work out how much a 2% fee will cost you, do the following:
Get a calculator (Start menu-all programs-accessories-calculator)
Type in the amount you owe, e.g. 2500
Press times (X) 0.02
The answer is the fee you will pay for the transfer.

□ Choose a card with lots of whistles and bells (airmiles, free gifts, legal advice…) but always pay off your balance completely EVERY MONTH. This is the only way you will gain. If you pay your balance in full every month you won't pay interest, but remember-

□ Don't use your card for cash! If you do, 99% of credit cards will charge you interest from the day of withdrawal, and you can bet your bottom dollar, the APR will be high.

□ Pay for items which cost between £100 and £30,000 with your card, as long as you can afford to pay the bill IN FULL. You get protection under section 75 of the Consumer Credit Act for these purchases. If the goods are faulty, never arrive or the supplier goes bust, your card provider has to pay up.

□ You can get up to 59 days interest free on you purchases, if you're smart. You need to know when your statement date is, and buy something on that day. You'll then get a whole month before your next statement, and up to another 29 (but usually about 15) days to pay your bill. Again, this is only worth doing if you always pay your bill in full.

□ There are some charity cards out there, for example the RSPCA do one, which I have. They donate money (about 1%) every time you use the card.

SOMEONE'S KNOCKING AT THE DOOR…

If you do find yourself in financial trouble, don't despair. There is a great charity which is dedicated to debt management: www.cccs.co.uk . Their services are free and confidential. Online, you can input your debts, earnings and bills, and they it tell you if you need help. Initially there are questions about such things as receiving bailiff letters, paying only the minimum, playing late fees and whether you are living off your credit card. If you need help, there is a free phone help line: 0800 138 1111, Mon-Fri 8 am till 8 pm.

FINAL WORDS
For those who are still interested - :o) - I now have about £2500 worth of credit card debt. Since 1995 my bills have been more up than down, and I they have never been paid off since that initial £1000. The balance I now have probably represents nothing but interest on the money I've borrowed. I don't earn enough to pay it off, because I live in one of the poorest countries in Europe- Bulgaria. But I'm happy because I know the situation is under control. I can remember a day back in the UK about 11 years ago, when I put my credit card in the cash machine in order to withdraw cash to pay off the very same account, and subsequently bursting into tears. If you're in a situation like this, phone the CCCS now!

 

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