Disaster For Halifax Cardholders!

The giant Halifax/Bank of Scotland group has slashed minimum monthly repayments on its credit cards. This may seem like a lifeline, but it's actually a nightmare...

Do you know how much the minimum monthly repayment (MMR) on your credit card is? If you're a `full payer' (you always pays off your bill in full every month), then your MMR isn't important to you. However, if you do borrow on your credit card, then it's vital that you know and understand minimum monthly repayments.

For example, an MMR of 10% means that you must repay at least a tenth of your balance each month. In the Eighties and Nineties, an MMR of 10% was the norm. However, following the invasion of what I named the `American Eagles' (Capital One, MBNA and so on), MMRs started to tumble. First, they fell to 5%, then 3% and continued to slip until, nowadays, they are as low as 2% to 2.5%.

Of course, the main reason why credit-card issuers allowed MMRs to fall so low is that it makes them far greater profits. This is because the lower the MMR, the longer it takes to reply a debt and, therefore, the more interest you pay.

HBOS slashed its MMR

Late last month, `Big Five' bank HBOS (whose brands include Bank of Scotland, Birmingham Midshires, Halifax, Intelligent Finance and Sainsbury's Finance) wrote to its cardholders. It informed them that, with effect from 1 October, their MMR would be reduced from 2% to the greater of:

1. 1% of the outstanding balance; or

2. an amount equal to the interest and insurance premiums charged, plus any penalty fees, plus £5.

However, almost all standard HBOS-issued credit cards charge an interest rate of more than 1% a month (12.68% APR). Thus, almost all customers will pay the second amount, which consists of all new charges to the account plus £5.

In effect, the vast majority of cardholders will see their MMR slashed to such a low level that it will only repay £60 of their debt each year. Thus, a relatively modest debt of £2,400 will now take four decades to repay!

Although HBOS is promoting this change as a positive move for cardholders, I disagree strongly. Lower monthly repayments can help to reduce financial stress in the short term. However, they also transform modest debts into a lifetime of slavery.

For the record, HBOS has around four million credit-card customers. Around one in nine cardholders (11%) pay only the minimum monthly repayment, so this change will directly affect around 450,000 accounts. Note that this MMR reduction will not apply to student credit cards.

Good news for rate tarts

Then again, this is great news for `rate tarts' -- those canny cardholders who avoid interest by switching between 0% credit cards. Given that these card sharps don't pay any interest, they will welcome a 50% reduction in their MMR from 2% to 1%.

Watch out for statement inserts

Finally, as the credit crunch bites, I expect more and more card issuers to make changes to their terms and conditions. Therefore, do watch out for those pesky little statement inserts informing you of sneaky tweaks to your account!

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