Debt -
Credit Card Holders and Further Rates Hike
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In February this year, Egg announced that it was cancelling the credit cards of 161,000 of its customers. The decision, according to it, was to weed out those who constituted high risk. That was, for many customers, a wake up call to the long travail that would follow.
The next thing to happen to them was the decision by a number of credit card issuers to slash off the credit limits of many customers. Some even had as much as £1000 or more taken off. This move, just like the Egg decision, was explained as one warranted by the need to deal only with those customers considered very prudent. But a few complained they were not in any way high risk consumers.
While credit card companies insisted they were taking the decision in good faith as credit crunch continued to metamorphose into a hydra-headed monster, some analysts explained that prudence in this case may not necessarily mean paying off your balance at the end of each month or refusing to use up your limit. But using up the limit and paying up in bits, including the interests and fees that keep accruing, is what prudence really means. This is because the firms are in business to make profit and the interest consumers pay is what makes the profit for them.
Credit crisis, in the last few days, bred more complications for credit card holders. Lenders have, in a bid to recoup profits lost in the course of the financial misfortune, turned the weapons on credit card holders. Currently consumers have had their rates hiked up to the level that they would be paying an extra charge of £50 on their average bill.
The decision, which had been predicted following the earlier cancellation of cards and cut in credit limits, was taken by almost all the major card issuers. It will, as such, affect the 31 million people in the UK who use the cards.
The rates, according to a study by MoneyFacts, were raised from 14.9 per cent to 16.4 per cent on the average within two years.
Based on the increase, the study warned, those who usually do not pay off their bills at the end of each month would face the full impact of the hike, as they would be paying the higher rate. In this category are 13 million card holders. However, for the 18 million people that often pay off their balances each month, the impact won’t be so severe.
In the UK credit cards have become a source of supplementing income for some people. Many people have even resorted to borrowing from one lender to pay off another. This, perhaps, explains why the amount owed by credit card borrowers hit a total of £54.8 billion, according to figures released by the Bank of England in February. For every borrower who fails to make a full payment at the end of the month, the figure suggest there is an equivalent of £4,218 in debt.
A further effect of the rise is that those who make the minimum repayment of 2.5 per cent every month would end paying an extra of £53.28 in the first year of paying back their debt. The implication of this is that by time the full life of the debt is reached in 30 years, the borrower would have paid an addition of £644.
Credit crisis, although it has waged a sustained battle on everyone, it is at the moment significantly hitting credit card holders harder. With the increases and threats of further penalties, it appears the only watchword for users is caution.
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