Revolving credit: towards a “responsible credit”?

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Would the revolving credit finally become a “responsible credit”?

Would the revolving credit finally become a "responsible credit"?

This is one of the most controversial subjects of the draft bill on consumer credit currently being consulted by the Ministry of the Economy, Industry and Employment (see MINEFE file following the meeting of Monday, March 16 with consumer associations).

What are we talking about ?

What are we talking about ?

Some figures on what revolving or renewable credit represents in France (figures at the end of 2007, sources report Athling):

  • The outstanding revolving credit was 28.9 billion USD (second European rank behind the United Kingdom with 90 billion $),

  • Revolving credit represents 20.3% of consumer credit,

  • The share of revolving credit increased from 27% to 20.3% between 1998 and 2007 mainly in favor of the personal loan, which increased from 36% to 52% in the same period, the former being mainly distributed by specialized establishments, The latter being essentially distributed by the banks.

  • The share of consumption financed by the revolving credit is 2.7% and has been declining since 2005.

  • Outstanding revolving credit per household (all households including those without revolving credit) is $ 1105.

  • 85.5% of over-indebtedness cases include at least one revolving credit. The average revolving credit for these files is 5 credits.

  • The number of open revolving credit accounts is 43.2 million and the number of active accounts (recording at least one interest payment) is 46% or less than one in two.

These figures show the spread of revolving credit among households but also an evolution that goes in the direction of its decline even if the “revolving” remains associated with overindebtedness situations.

Consumer credit reform

Consumer credit reform

Seizing the opportunity of the transposition into domestic law of the directive on consumer credit dated April 23, 2008 the government has chosen to reform the consumer credit and mainly the revolving credit.

The main directions of the bill – not made public and whose parliamentary debate is announced before the summer – were presented to consumer associations on March 16.

Several measures result from the mere transposition of the Directive, in particular the increase from $ 21,500 to $ 75,000 in the amount of loans falling under the Consumer Code and the extension of the withdrawal period from 7 to 14 days.

The notion of ” responsibility ” is central to the reform. Credit is thus presented as an act that “commits” and whose consequences can be significant for households. If it is “useful”, the credit must also be “responsible”, a responsibility that must be shared between the borrower and the professional.

Unsurprisingly, the government is attacking ads that are considered aggressive but that, above all, do not give the right information: to emphasize that the product is indeed a credit, in the future, all advertising must include a mandatory mention and that will be identical for all advertisements: “A credit commits you and must be refunded”. Another factor of confusion and uncertainty about revolving credit, its real cost: any advertising for a credit will have to illustrate its cost by a standardized and representative example, which will be the same for all advertisements. It should be noted, however, that the revolving nature of the revolving credit prevents any calculation of the actual cost. As pointed out in the Athling Report, the TEG is not always a relevant indicator because the cost of credit depends very much on the mode and duration of depreciation.

In fact, the credit must be repaid! That is to say that its deadlines must not only provide for the payment of interest but also a portion of the repayment of the capital borrowed. The idea seems a priori surprising, any credit must necessarily be refunded! But one of the key provisions around the reform will concern the actual repayment of revolving credits, whereas today the repayment of capital is often slow and expensive, because of the low monthly payments of capital repayments most of the time provided for in the contracts. Remember that the interest paid is calculated on the share of the capital remaining due; therefore, if the borrower has too low monthly payments, he repays little capital, and essentially interest, and will take a very long time to repay.

Future revolving credit account statements should also provide new, highly relevant information since it is an assessment of how long credit repayments will take, other things being equal. that is, if the monthly payment and the capital draw remain the same.

An important part of the reform concerns the distribution of revolving credit at the point of sale. By “places of sale” we mainly aim retail chains: when we consider that nearly 54% of revolving credit accounts are opened through these channels (note for example the weight of revolving in the sector of mail order: 40% of turnover), we understand the stakes: substantially improve the information of consumers by sellers, and put in place by credit professionals control systems on the solvency of the customer, while these professionals are frequently not physically present at these points of sale.

For the information to be significantly strengthened, as required by the European directive, the lender will have a “duty to explain” to the borrower. The person who distributes the credit at the point of sale will also have the obligation to complete with the consumer a “dialogue and information sheet” making a statement of the borrower’s income and indebtedness.

These two principles must, from a financial point of view, be accompanied by concrete measures of education for both customers and sellers. This opinion is shared by the authors of the Athling report, who propose to “set up a training course on the credit of the seller in store”, and to “provide in the school curriculum lessons on budget management.” And we are preparing adapted tools.

The reform provides for control of the marketing of revolving credit at the point of sale by the services of the Banking Commission. Reform far from superfluous, which seems to reflect a strong awareness by the government that the conditions for marketing revolving credit are not always ideal…

Will this new “arsenal” be enough to make revolving credit more accountable?