Credit card companies are to be banned from using customers’ payments to clear balances attracting the least amount of interest before more expensive debt under new measures unveiled today.
This will save customers an estimated £224 in the first year, according to Nationwide, with credit card companies making around £500 million a year through this payment method.
The move is part of a package of measures designed to give the credit card sector a major overhaul.
The Department for Business, Innovation and Skills, the UK Cards Association and the Finance and Leasing Association have outlined several new rights for credit card users:
* Minimum payments for new customers will cover interest as well as fees and charges, plus 1% of the capital.
* Customers will be able to opt out of having their credit limits increased. They will also be able to reduce their limit at any time.
* Consumers will be given 60 days to reject increases in their interest rate or their credit limit.
* People at risk from financial difficulties will be given guidance on the consequences of paying back too little.
* Annual statements will be sent out to consumers allowing an easy cost comparison with other providers.
Prime Minister Gordon Brown says the changes will move the balance of power back towards consumers.
“These new rights will put an end to the irresponsible lending practices that people have been most concerned about, and help cut the cost of borrowing," he adds.
Original proposals from the government were for credit card companies to be banned from increasing credit limits without permission and from raising interest rates on existing debt.
However, the card industry rejected these changes.
Peter Vicary-Smith, chief executive of Which?, says the measures being implemented don’t go far enough in protecting vulnerable consumers.
He adds: “It’s now time for industry to step up to the challenge and offer credit card users clearer and fairer terms and conditions, and weed out irresponsible lending practices.”
Alongside the new credit card rules, the government has also published measures designed to encourage responsible borrowing and lending, and help people avoid taking on unmanageable debts.
New regulations, which will be introduced before the summer, will require lenders to check customers can afford a loan, give clear information on new loans and give a 14-day cooling off period during which new loans can be cancelled.
Lenders who fail to comply run the risk of having their licence to lend withdrawn.
People who are receiving debt advice or have fallen victim to ID fraud will be able to recieve a copy of their credit records online or free from June 2010.
There will also be more pressure of lenders to reduce or freeze interest and charges, and accepting token payments, from people who suffer a sudden income shock.
Finally, those suffering the most serious financial hardship, may be given independent money advice to help them manage their debts.