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
Sunday 21 March 2010
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 CashQuestions.com 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.
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 2 Instagram of US airport security chiefs: Lipstick knives and IED training kits among items seized
- 3 Brazil vs Germany World Cup 2014: In defence of Mesut Ozil - the Arsenal midfielder works magic in the shadows
- 4 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
- 5 Tony Abbott embarrasses Australia by praising Japanese WWII military, ‘getting on the sake’ and posing for ‘crotch-shot’ photo opportunity
Sustained immigration has not harmed Britons' employment, say government advisers
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
There’s a nasty smell in the political air – and it’s coming from the Tories
Vanessa Feltz criticises 'vile' reaction to Rolf Harris allegations
iJobs Money & Business
£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...
£60000 per annum: Harrington Starr: A leading provider in investment managemen...
£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...
£30000 per annum: Harrington Starr: A global leader in trading platforms and e...
Day In a Page
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay