Credit card demons revealed
In public, credit card and debt collection firms pay lip service to official guidelines protecting consumers, but staff are given financial incentives to recover debt, provoking the sort of harassment that makes millions of debtors' lives a misery.
There are as many credit cards in the UK as inhabitants – 61 million, with the collective balance standing at £60.5 billion, according to the British Bankers' Association.
But the credit crunch means the days of easy credit are long gone and the industry's focus has shifted to chasing payments and concocting new charges.
Heather Keates, chief executive of debt counsellor Community Money Advice, says: "Card firms are jittery and increasing interest rates. Creditors now go in hard from the outset."
The Office of Fair Trading (OFT), which issues lenders with consumer credit licences, publishes guidelines on debt collection.
These require lenders to negotiate with third parties such as debt management companies, and say that debt collectors must give debtors advance notice of visits. Debtors can also request not to be contacted at work.
Debt collection firms pretending to be bailiffs or falsely threatening criminal proceedings also risk being fined or having their credit licence revoked.
But it seems the guidelines carry little weight with the banks. The Citizens Advice Bureau (CAB), which handles more than 350,000 cases of credit card debt annually, gives the example of one client's experience.
Jane, a 42-year-old single mother, was struggling to keep up with a £7,000 credit card debt on the £589 she takes home each month from her part-time job. She made the minimum payments, but when she defaulted recently, her bank began to phone her up to six times a day, even at work.
When the CAB intervened, the bank's representative claimed to know nothing of the OFT guidelines and blamed the repeated calls on an automated system.
The use of automated dialling systems is commonplace and can result in customers receiving multiple calls every day.
Halifax is one of the banks that Marc Gander, founder of online forum Consumer Action Group, singles out for criticism: "We've been hearing serious complaints about Halifax for several years. Some people resort to buying a pay-as-you-go mobile just to avoid harassment."
Some of the worst offenders
Debt charities and advice services cite examples of good and bad behaviour by every credit card provider, but some come in for particular criticism.
Lloyds TSB - Community Money Advice named Lloyds TSB as the worst creditor to negotiate with at its conference last year.
MBNA - The US firm recently came bottom of a credit card customer satisfaction survey by Which?, scoring only 51% for customer service.
American Express - The American credit giant is singled out by several debt advisors for its poor attitude towards intermediaries negotiating individuals' payment plans.
Halifax - Marc Gander of the Consumer Action Group says: "Halifax's repeated phone calls are one of the greatest sources of complaint on our messageboards."
A spokesperson for Lloyds Banking Group, which includes both Halifax and Lloyds TSB, responds: "We try to establish contact with customers in financial difficulty at the earliest possible stage.
"The vast majority of our customers facing difficulty contact us or respond to these early attempts to engage. We will only proceed with debt collection activity when all other possible options have been exhausted."
Alex MacDermott, the CAB's national credit liaison policy officer, says: "It's always better to talk to the card provider, otherwise your number will stay in the automated dialler, which will keep ringing. But the tone of some calls can be very threatening."
The latest Bank of England figures indicate that default rates on unsecured loans – including credit cards – have fallen over the last year.
But its research also shows that lenders have written off record levels of credit card debt – £3.4 billion in the first half of 2010.
While historically low mortgage rates have meant that some consumers now have more money to pay off other debts, many more remain unable to reduce their borrowing at all.
Times are certainly getting tougher for society's most vulnerable groups. Britain's pensioners, for example, spend an average of £1.6 billion a month on credit cards, according to market researcher GfK NOP.
While some providers employ in-house debt collection, others 'sell on' debt to a third party – although the Consumer Credit Act requires that they first issue a default notice to customers who have skipped payments to inform them which company has taken on the debt.
The OFT has criticised debt collection agencies for making frequent phone calls "threatening court action and not describing the process correctly", and has also concluded that many default charges are unlawful.
The watchdog says that £12 is the maximum that anyone should be penalised for missing a payment. But Keates says: "A lot of debt collectors are paid a percentage of what they recover, so it's in their interest to get a payment plan set up, even if they know the debtor can't stick to it."
Alongside usurious interest rates, some credit card companies have sneaked new fees into their small print.
Since last November, the FSA has introduced a requirement for banks and building societies to provide customers with clearer terms and conditions – a cue for some to add charges for cash advances, balance transfer fees and costs for using a card overseas.
Penalties for not using cards, so-called 'dormancy fees', are now employed by American Express, which charges £20 for every 12-month period that its plastic goes unused by a customer. Santander applies a similar £10 charge every six months.
Another concern is the banks' 'right of set-off', entitling them to raid the accounts of customers with outstanding debts elsewhere with the same bank.
This means money can be taken from your current account without your consent to pay off an outstanding credit card bill, for example. The CAB has reported an 80% increase in complaints about this practice over the last three years.
The problem is the Lending Code is voluntary and critics say many of the providers which have put their name to the pledge flout its rules.
Under the code, lenders must negotiate with third parties such as debt management firms, credit counsellors or debt charities, but some go-betweens report that financial institutions ignore their approaches.
Keates says: "Lloyds TSB is terrible to deal with, as is American Express, which often refuses to talk to third parties."
In reply, an American Express spokesperson insists: "If customers are already enrolled with a debt management company, we work with that third party."
* Some names have been changed to protect individuals' identities
Where to go for help
Counselling services can help devise debt management plans and negotiate with creditors. Non-profit organisations include:
The Consumer Credit Counselling Service: cccs.co.uk (0800 138 1111)
National Debtline: nationaldebtline.co.uk (0808 808 4000)
Citizens Advice Bureau: visit citizensadvice.org.uk to find your nearest branch
Community Legal Advice: communitylegaladvice.org.uk (0845 345 4345)
Community Money Advice: communitymoneyadvice.com (0174 334 1929)
OFT helpline Consumer Direct: consumerdirect.gov.uk (0845 4 040 506)
The Financial Ombudsman: financial-ombudsman.org.uk (0800 023 4567)
The biggest providers: raw deals and extra charges
Barclaycard (16% of the UK market, according to Mintel): Barclaycard's Initial card, designed for customers wanting to repair their credit rating, has an APR of 29.9%.
Lloyds TSB (13%): Lloyds' Airmiles Premier Duo Amex card charges an annual fee of £50 and has an APR of 20.3%.
NatWest (10%): its Classic Card Mastercard has an APR of 19.9%.
Halifax (8%): its Plus Mastercard charges interest from the date of an item's purchase if the account is not cleared in full every month.
HSBC (8%): customers may be issued an alternative credit card to the one for which they have applied, dependent on their credit status.
MBNA (6%): its Travel American Express card charges an APR of 31.5% and carries an annual fee of £95.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.