Breathing Space Offered by Lenders By Michael Challiner At Isnare.com Ezine Articles

Britain's biggest credit card company, is offering borrowers the chance of a two and a half year break from their credit card debts. This is if they opt to pay an extra charge on their spending.

This is an unusual type of plan, as it gives holders of its credit cards the chance to stop repaying their debts if they have their income drastically cut. Other lenders seem destined to follow suit.

Banks have recently been barred from selling PPI (Payment Protection Insurance) alongside credit cards and loans. PPI is supposed to meet your monthly repayments when you lose your job.

The debt suspension option from lenders is not an insurance policy, they claim. Like most credit cards, you get a 56-day interest-free period to pay off your debts and the standard credit card charges a typical interest of 17.9 percent.

This means that if you repay your card in full each month you will not be charged interest, along as you have not withdrawn money out of a cash machine. To gain access to the debt suspension period, when you take out your card now, you will be given the option of paying a separate fee, which is equivalent to 0.89 percent of your daily average balance in any month. For example, if you average daily balance was 100 pounds your fee for that month would be 89 pence.

If you made redundant or go on maternity leave, the lenders will allow you to stop repaying your debt for up to two-and-a-half years. You will also not be allowed to spend on the car but importantly no further interest will build up either.

A spokesman for the lenders says: "If you owed 2,500 pounds when you took the payment holiday, then you will still owe 2,500 pounds two-and-a-half years later. We want to give people this breathing space to get on top of their debts. It's a long period of time to be able to do this." If you repay your bill in full every month, you would not be charged the 0.89 percent fee as your average balance would be nothing.

A spokesperson for the consumer watchdog, said: "I've never come across anything like this before. This looks like a poor-value variation on PPI and it's quite confusing. Your income has to drop by 25 per cent, which is a big fall if you're also receiving statutory sick pay or redundancy payments. Consumers would be better off buying an income protection policy which gives you the freedom to choose what you do with the payout."

The Government and credit card industry have recently made an agreement that lenders must provide breathing space for at least two months in people fall into financial difficulty. No interest is to be added during this time and the interest rates cannot be increased. To qualify cardholders have to consult a free debt counselling service.

The Competition Commission have also ruled recently that providers had to wait a minimum of seven days after you had taken out credit, such as mortgage, loan or credit cards, before they could try to sell you PPI. This would then give you time to shop around and consider whether you actually need it. PPI had been bringing in around a staggering 5.5 billion pounds a year in premiums.

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