School leavers need to get back to plastic basics

Andrew Hagger of Moneynet.co.uk looks at how the use of credit cards has changed and how it shows a very real need for mandatory personal finance education.

So credit card charges have increased, no real surprise there, but maybe it’s not just down to card providers being greedy.

Rather than use their little piece of plastic as a way to manage cash flow or to cover that emergency car repair many consumers have come to view their credit card as an extension of their overdraft limit, especially during the last ten years where we have witnessed the evolution of a live for today culture where we ‘buy now and worry about paying later’.

Whilst credit was cheap and inflation was under control, this was not such a problem – banks were benefitting from their ideal scenario - consumers not paying their credit card statement in full and generating a huge revenue stream of credit card interest.

However as the cost of living has increased and consumers’ budgets have become stretched, lenders start to see more of the following:

More customers only making minimum payments

Payments made late or missed completely

Cash advances taken on plastic

Customers taking out new cards just to pay existing credit card debt.

When card providers start to see these warning signs they reassess the risk that these customers pose and not surprisingly, adjust their pricing accordingly.

Whilst it could be argued that they are profiteering, some providers have also taken preventative action in the past. For example Barclaycard cut the credit limit of 500,000 customers in 2007 where they had information which led them to believe that some customers were potentially experiencing difficulties in repaying their total borrowings.

At one time credit cards were granted to customers without access to data from other banks and card providers, however now there is far greater sharing of such information; it is no surprise that over 50% of credit card applications are declined.

The level of reliance upon credit card borrowing and associated costs of exceeding your limit or drawing cash on your credit card highlight a real need for personal finance education in order to prevent more people falling into a spiral of debt and trashing their credit record.

As soon as we reach 18 we are potential fodder for the well oiled credit card marketing machines – enticing us with 0% interest deals in the hope that we use the same card to spend on and fall into the little known,’ negative hierarchy of payments’ trap.

If we left school/university and understood the following five facts about borrowing on plastic, then perhaps there wouldn’t be the levels of heartache that currently causes misery for borrowers and mountains of bad debt for lenders

Five credit card facts that every school leaver should be taught

1. What is an APR and how does it relate to the monthly interest rate shown on your credit card statement.

2. How much interest you end up paying for your credit if you only make minimum repayments

3. The financial impact of spending on a credit card used for a 0% balance transfer

4. The additional interest and fees associated with cash advances and credit card cheques

5. How you can use the card to your advantage if you use the interest free days and then pay your statement balance off in full.