Crackdown on credit cards begins at last

New rules on plastic could save consumers £500m a year. Chiara Cavaglieri looks at how they will affect borrowers – and how lenders may retaliate
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The Independent Online

The Government finally revealed details of its credit-card crackdown last week. A joint commitment made by the UK Cards Association and the Department for Business and Skills has laid out new standards offering consumers more control and protection, which could save buyers around £300m a year. But what do these changes actually mean for plastic-card users? And have they gone far enough?

What are the new rules?

The new rules have outlined five new rights for credit-card users, covering the right to repay, the right to control, the right to reject, the right to information and the right to compare. Under these rights, lenders will have to order repayments to clear the most expensive debt first, and face both tougher rules on raising interest rates and restrictions on credit-limit increases.

The Government predicts this will save Britain's 30 million credit-card users a total of £296m a year, but Nationwide Building Society expects a more impressive £500m a year. However, that's not taking into account whatever sneaky new ways the credit-card companies can conjure up to pad their profits once more.

When do the changes come into force?

You won't have to wait long to reap the benefits of these changes as the joint proposal has stated that they will come into effect by the end of this year, and be given statutory force "as soon as possible". Lenders will technically have until 31 January 2011 to comply with the new conditions but we are likely to see many of them making a move much earlier.

What do the rules mean?

The most significant of the changes is the right to repay, which affects the order in which you pay off your credit-card debt.

Debts can be held at different interest rates on the same card, so a balance-transfer debt will be charged separately from a purchase debt or cash withdrawal. For example, a credit card might have an attractive balance-transfer offer at 0 per cent, but could charge as much as 30 per cent on cash withdrawals.

As things stand, the vast majority of companies operate a negative payment hierarchy, which in effect means that payments are used to pay off the cheapest debt first. The credit- card company can then lock in your most expensive debt for as long as possible. It means people who thought they had a 0 per cent deal for a year or so are quickly paying 30 per cent on much of their balance because they used the card and the issuer used the payment against the 0 per cent balance rather than against the higher-rate balance. Under the new rules, this will no longer be possible as companies will have to allocate any credit card payment "positively", using it to clear the priciest debts first.

The new rules also aim to encourage better repayment habits. For new accounts, the monthly minimum repayments (MMRs), which are often set at very low levels, will have to cover interest, fees and charges at the very least, plus 1 per cent of the outstanding balance.

If you're an existing credit-card holder, the current minimum payment level won't change, but your lender will get in touch if you only ever pay this to highlight that this is the most expensive way to clear your debt. The difference between repaying only the bare minimum and setting aside a regular lump sum repayment each month can be stark. "Someone making a minimum 2 per cent monthly repayment on a £1,000 balance on a credit card charging 20.9 per cent APR would take 37 years, one month to clear the balance. If they repaid £50 every month the balance would be cleared in two years, one month," says David Black, a banking specialist at analyst Defaqto.

What about rate-jacking?

Other rules are set in place to cover your right to control unsolicited credit limit increases so that you can choose not to receive any limit increases or reduce your credit limit at any time. More importantly, you will also be able to reject any proposed interest rate hikes – or rate-jacking. Lenders are still entitled to raise interest levels but you will have a 60 days' notice period, double the current period, to reject the increase and close down the account (by either clearing the debt, or moving it on to a card with a more appealing rate). Finally, companies must send you an annual statement, complete with details of any fees, rates and charges, to make it easier to compare them to other providers and potentially switch to a more competitive deal.

Why have the new rules been introduced?

These changes are a response to the Government's consultation on credit and store cards in July 2009. The review was then opened to public consultation and from the feedback, as well as negotiations with the card companies, these rules have been introduced to reduce the problem of irresponsible lending practices.

How might the lenders react?

Annie Shaw of predicts that card firms will seek to recoup estimated losses by offering less generous 0 per cent balance transfer deals, which will be more difficult to obtain and carry higher fees. "In addition," she says, "standard purchase rates will be edged up for all customers and we could even see the reintroduction of annual charges for credit cards if lenders can't make sufficient profits via interest rates."

What should you do?

For now, before the changes take effect, it is crucial to manage your credit card debt appropriately, both by clearing the debt as quickly as possible and by comparing other interest rates available. If necessary, you should switch to a card which better suits your needs.

It's a good idea to check the repayment terms of any new credit card deal. At the moment, only Nationwide and Saga already conform to the new rules governing positive payment hierarchy. "People have always used their cards in different ways and credit-card companies have always charged different rates, so we decided it was fairer to help our customers pay off the most expensive debt first," says Steve Blore, from Nationwide.

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