New laws to stop credit card firms exploiting customers
Credit card companies are to be banned from increasing credit limits without consent and from using repayments to clear the cheapest debts first under a major overhaul of the credit card sector.
The government wants to introduce new laws that will also see minimum monthly repayments increased and credit and store card providers banned from hiking interest rates on existing debts.
“Card companies have to get their act together and do more for consumers," said consumer minister Kevin Brennan. "My opinion is clear - the current relationship between card companies and consumers cannot go unchallenged. We need to put the customer back in the driving seat."
|Proposed measures include:|
|Banning credit card companies from using repayments to clear the cheapest balance first - known as negative payment hierarchy|
|Raising the minimum monthly repayments levels to encourage people to pay off their debt faster|
|Banning providers from increasing credit limits without prior consent|
|Placing restrictions on increasing the interest rate on existing debt|
“It is not acceptable for card companies to impose complex and confusing terms and conditions that can leave people baffled, or to increase interest rates without a proper explanation," says Brennan. "Consumers have a real responsibility to manage their finances properly, but they also have a right to clear information to enable them to do that."
The proposed legislative changes have been put forward in a consultation that will run until January next year.
Why is the government concerned?
Credit cards are one of the most widely-held financial products, yet providers stand accused of ripping off customers. The four changes proposed by the government present the most concern.
The government has already introduced measures to stop credit card companies from inflicting unjustified rate rises on customers and to ban credit card cheques.
Since January, card providers are banned from raising interest rates in the first year of someone holding a card. After that they can only increase it once every six months, and must give customers at least 30 days' notice. Customers who have suffered rate hikes are now allowed to cancel their cards and pay off any outstanding balance at the old rate.
However, there is no limit on how much credit card providers are allowed to hike up rates by.
And concerns remain that consumers are still being exploited by providers.
Around a third of people who don’t pay off their credit card bill in full each month make only the minimum repayment - but this can add signifcantly to the cost of debt, which is why the government is considering introducing a mandatory higher minimum payment each month.
Meanwhile, an estimated 5.7 million consumers saw their credit card limits increased without their consent last year, according to uSwitch.com. Amid concerns that this not only encourages people to run up debts, but can also damage their credit rating, the government is considering banning this practice or requiring consumers to opt-in to credit limit increases.
Negative payment hierarchy is also a worry, as not only does it confuse consumers, it can also add significantly to the cost of using a credit card. While you might consider your credit card debt as one lump sum, different elements will attract different rates of interest, and the vast majority of providers use repayments to clear the cheapest balances first.
Finally, the past 18 months have seen credit card providers not only increase average APRs for new customers, but also raise rates on existing cardholders. The government is now considering banning or restricting the repricing of existing debt.
What will it mean for you?
Credit card providers warn the new rules will mean less choice and higher costs for consumers.
“These proposals risk disadvantaging more customers than they protect,” says Melanie Johnson, the chair of the UK Cards Association. “It’s important we maintain the flow of credit to customers who want to have the flexibility and ease of use that credit cards offer."
And indepedent experts agree. David Black, banking specialist at data provider Defaqto, is concerned about the impact the new rules will have on credit card customers.
While they should provide protection to many borrowers, especially those people who don't pay off their balances in full each month, others may suffer as a result.
Black believes that banks will seek to recover their lost income by increasing rates across the board, introducing extra charges and even annual fees and offering less generous reward schemes.
“The long-term implications are that we are likely to see less attractive credit card offers in the future in terms of rates, charges and rewards as the banks seek to regain lost income in other ways," he adds.
However, Phil Jones, personal finance campaigner at Which?, says the proposals will stop card providers from using the tricks of their trade to the detriment of millions of consumers.
“We think it’s simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible," he adds. "The sooner these practices are stamped out, the better.”
Meanwhile, the proposal to force card providers to use repayments to clear the most expensive, rather than the cheapest, debts has been welcomed.
Chris Rhodes, product and marketing director at Nationwide, which is one of only two card providers not to employ negative payment hierarchy, welcomes the action on payment structures.
"We think all UK credit card providers should allocate payments in a positive way,” he explains. “The US has already recognised that the practice of paying the cheapest debt first is unfair to customers and is forcing lenders to be more consumer friendly.”
Michelle Slade, spokeswoman for Moneyfacts, agrees that negative payment hierarchy contradicts general debt advice to pay off the most expensive debts first. " A change to this policy would be a real step forward for consumer fairness in the credit card market," she adds.
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.