Britain s biggest credit card company is behind a new idea to give the holders of its credit card the option to stop making repayments if their income is drastically cut. In practice, it s a form of payment protection insurance (PPI) which lenders have been barred from selling alongside forms of credit but the bank claims that its debt suspension option is not an insurance policy.
When you take out the card you are given the opportunity to pay a separate fee equivalent to 0.89 per cent of your average daily balance in any month. Therefore, if your average daily balance was 500 pounds, your fee for that month would be 4 pounds 45 pence.
This fee entitles you to take advantage of a debt suspension period, subject to certain conditions. If your net income suddenly falls by more than twenty five per cent for example because you’ve become unemployed, or are on maternity leave then the credit card will allow you to stop payments for up to two and a half years and no interest will be added. But at the same time you won t be allowed to use the card.
To us this looks like a poor value variation on Payment Protection Insurance and it s quite confusing. It doesn t repay your debt it simply suspends it and your income has to drop by 25 per cent, which is a lot especially if you are also receiving redundancy payments or statutory sick pay.
We believe that people would be better off buying an income protection policy which pays out each month if you are made redundant or are off work due to sickness or an accident. You can then use the monthly payouts to continue paying your monthly credit card repayments and reducing you debt. And should you want to, you d still be able to use your card.
The cost of a stand alone PPI policy is about 5 per cent of the monthly payment you want to receive and you can cancel the insurance at any time without penalty. This policy then gives you the freedom to choose what you do with the payout and the payouts are tax free.
Following an agreement between the credit card industry and the Government, credit card providers must provide a breathing space of at least two months for card holders in financial difficulty. During this period, the interest is not added to the debt and the interest rate must not be increased. In order to qualify for this breathing space, cardholders in difficulty have to consult a free debt counselling service.
Whilst credit card companies and indeed loan companies, can t sell payment protection insurance at the same time as a client takes out a card or loan, they can do so after a waiting period of seven days after you had taken out credit. That is according to the regulations introduced by the Competition Commission. This waiting period gives clients time to consider whether you need it and then shop around for it. In our experience you can buy PPI cover online for a faction of what a lender would like to charge you!
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