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

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.

election 2015The 10 best quotes of the campaign
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'