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The insanity of personal credit

I’ve recently had what I’ve been describing as a Big Win on the Payment Protection Insurance Lottery – a refund of PPI which was mis-sold to me as part of a personal loan several years ago.

by David Merrigan

The amount of the refund is not quite life-changing, but it’s certainly game-changing as far as my own personal finances are concerned, especially since theoretically I should have another refund for similar  mis-sold PPI on another, now paid-off personal loan, due to me in the new year, once I get around to putting in the claim for it.

Now, I’m not going to deny that I’ve initially had a little bit of fun with the cash, by upgrading my camera equipment to help me to make better videos. Since I do that kind of thing as a ‘work’ activity (even though I don’t get paid for it), I think that’s a reasonable luxury I can grant myself. I’m also intending to put aside a little bit of the money so that I have ready access to ready cash in order to not have to always shop first in the reduced fridge at the supermarket – to know that actually, I now can afford to follow some principles in terms of looking at the origin of the piece of meat, and favour ethical production practices over dubious ones.

But the lion’s share of the cash I am indeed being sensible with, by using it to make a significant dent in paying off my remaining personal debt, and reducing the amount of my monthly income which goes into paying off that personal debt.

And that’s where the insanity comes in.

The balance of the loan on which the PPI has been refunded is £1,680, at an interest rate of 15.5%, with six remaining instalments to pay of £290 a month.

That’s not the only debt I have – there’s also three credit cards, one of which has a balance of £5,400 at an interest rate of 25.5%, and a monthly payment of £120.

Can you see what’s silly there?

For 95% of the population, debt is a reality, and not necessarily one to be afraid or ashamed of; few people under the age of 50 are truly completely free of debt, whether it’s a personal loan, a mortgage, student debt, or credit card debt.

The misery of debt is not, for most people, the actual balance of the debt, because that’s something which is purely notional and fictitious – it’s a number on a piece of paper they receive each month. The true misery of debt is not the balance, but the monthly payment required to service that debt – and the difficulty of seeing an end to that monthly payment in sight.

So for me, with a big wodge of wedge at hand to do something about clearing my own personal EU debt mountain, it’s insane to be presented with a choice of either clearing a (relatively) small debt attracting a (relatively) low interest rate entirely, or making a significant inroads into a much larger debt attracting a higher interest rate. The choice between releasing an expenditure of £290 a month or one of £120 a month is an obvious one – take the money, not the car. Realistically, big as the PPI windfall was, the most which could be put aside is £3,000, so actually that becomes a choice of releasing £290 a month or £70 a month.

The insanity of personal credit is how the repayments on credit cards work – not the higher interest rates, but the very mechanism by which the minimum payment – which let’s face it is what most people pay each month – doesn’t actually pay off the debt, it merely pays the monthly interest charge on the debt. The way the debt is structured, the credit card company holds all the power over the credit card owner; there’s no incentive for the company for you to pay off your credit card, because – like a gangland loanshark – the longer you remain in debt to them, the more money they will make out of you, way in excess of what you’ve actually borrowed from them. There’s no incentive for you yourself to pay off your credit card, because to do so will make little difference to what actually matters to you – your monthly outgoings.

This surely should be an area where government intervention should come into play?

It seems to me that the legislation around credit cards should be modified so that the customer is incentivised to not build up such a high credit card debt in the first place, to ensure that the monthly repayments are structured in such a way that the minimum monthly payment ensures they are always paying of a certain minimum amount of what they actually owe rather than just paying the interest, and that if the customer comes into a cash windfall, the monthly payment they are paying is sufficient that it will always be worth their while to pay off more than even the increased minimum amount.

If the customer then spends into that repayment the next month, then that is their concern – but the debt should always be structured in such a way that the balance of power of repaying it is put in to the hands of the customer, not the credit card company.

And in the meanwhile, if you’ve had a loan and paid payment protection insurance on it, consider the possibility that you too might be entitled to a refund; the classic reasons why you would definitely be entitled would be if your employment status was temporary, or self-employed at the time of the loan – but even if you were fully employed, being able to demonstrate that you were told it was an automatic part of the loan will be enough to get you a refund. You’ve got nothing to lose by making a claim! You don’t need to engage the services of a dodgy no-win-no-fee claims management lawyer (who will take a sizeable cut of your refund) – I just went into the bank and said ‘I want to make a complaint’, gave them the details, and six weeks later the money was in my account.

And of course, I’ve paid off the loan first.

One Response to The insanity of personal credit

  1. sismum says:

    and if you’d have had the need to make a claim due to deteriorating personal circumstances, you’d have been jolly glad to have had that payment protection insurance missold(?) to you!! Insurance is one huge gamble – “Risk, Chance or Fortuity”. (I passed an examination in the subject – See Associate of the Chartered Insurance Institute Examination Part 1 – Elements of Insurance Textbook Chapter 1) Personal experience has much to be grateful to some bank official suggesting same

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