Credit card companies will no longer be able to increase interest rates overnight or hit borrowers who have missed payments with higher APRs under a new set of fairness principles unveiled by the government.
Back in November, credit card providers meet with government ministers amid concerns that customers were not being treated fairly during the economic downturn. Providers were given a deadline of two weeks to agree to a set of principles, or face an investigation by the Office for Fair Trading.
Reluctant to face a probe by the consumer watchdog, all parties have now agreed to meet the new principles.
This mean that lenders will no longer be able to increase rates at short notice; instead, customers must be given 30 days notice of rate changes to give them a chance to find a better deal. Credit card providers must also offer customers the opportunity to pay off their debt at the existing rate.
Thirdly, struggling borrowers must be given more breathing space to deal with their debt. This means that credit card companies cannot increase interest rates for anyone who has failed to make their minimum payments for two months or more or has sought help from a debt advice agency.
Previously, credit card companies agreed to government demands that they will not chase debt for 60 days after someone misses a payment.
Gareth Thomas, consumer affairs minister, says: "I recognise that these changes will not be without financial pain for credit card companies, but it was vital that we nipped in the bud the bad practices that were causing real hardship for borrowers.”
People who have already experienced hikes have been urged to complain to their card provider if they felt it was unfair.
Alan Tomlinson, partner at licensed insolvency practitioner Tomlinsons, says the new principles will be a “lifeline” to many people who are struggling with credit card debt.
“For a lot of the people we see with serious debt problems, credit cards and their high interest rates are often the straw that breaks the camel's back,” he adds. “But remember that there's a big difference between principles and practice. It will be interesting to see whether credit card companies really do play fair in the months ahead or just pay lip service to the new principles."
However, there are concerns that credit card companies will look to re-coup the expense of implementing these new principles – with new and “good” borrowers likely to foot the bill.
Ricky Bruce, financial researcher at data provider Moneyfacts, explains: “There is no such thing as a free lunch and in the current climate it tends to be the people who have done nothing wrong that pay for everyone else. Credit card providers could put up rates on deals for new customers or increase fees.”
Being more lenient on struggling borrowers could also encourage bad habits Bruce warns. “These rules could be a help for people having debt problems but they could also encourage people to be more careless about making payments,” he adds.