The government announced new rules for
credit card issuers on Monday which it claims could save customers hundreds of millions of pounds a year.
The Department for Business, in a move that has been widely welcomed, has stopped the murky practice of credit card companies insisting that any money paid off was used to repay the cheapest debt first, trapping the expensive debt on the card for as long as possible.
Banks have now agreed, as part of a voluntary deal, to pay off the most expensive debts of a credit card off first. The Department for Business has calculated this move will save consumers £296 million, equating to £7 for each adult in a year.
Credit card companies will also have to inform customers when they intend to put up rates, making clear to consumers they have the right to cancel the card.
However, the government decided against setting a minimum monthly repayment for consumers, or capping interest rates on cards, prompting Liberal Democrat Shadow Business Secretary, John Thurso, to comment: "Credit card interest rates have been hiked to their highest levels since June 2006 despite the fact that interest rates have bottomed out at 0.5 per cent. We need a maximum interest rate put in place to end this profiteering.
"On average, a £10,000 debt repaid at the minimum rate will still take more than 35 years to pay off.”
Some campaigners said they were disappointed that the Government had not gone further and legislated to stop card companies increasing credit limits without asking.
"We have long since campaigned against malpractices in the credit card industry, including adverse payment hierarchies and unsolicited credit limit extensions,” said
uSwitch.com’s Rumina Hassam.
“Our research last year showed that a staggering six million consumers received a boost to their credit card limit without their consent. Alarmingly, consumers saw an average increase of £1,538, with their limit pushed from £5,129 to £6,667. The knock on effect was that the average interest bill jumped from £800 to £1,040.”
But commenting on the Government’s proposals, Peter Harrison, credit cards expert at moneysupermarket.com, said cardholders should be aware that this change in payment order may have some unintended consequences, for example a reduction of zero per cent balance transfer deals.
The package of measures, which have been agreed with the credit card and store card industry, gives consumers five rights:
• Right to repay: consumers' repayments will always be put against the highest rate of debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1 per cent of the amount they have borrowed.
• Right to control: consumers will have the right to tell their providers never to increase their credit limit, and the right to reduce their limit at any time.
• Right to reject: consumers will be given 60 days to switch provider if informed of an increase in their interest rate, and will be able to reject the offer of any increase in their credit limit.
• Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little; and all consumers will be given clear information on increases in their interest rate or their credit limit including the right to reject.
• Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.
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