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.

Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
Finacial products from our partners
Property search
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

    Senior Risk Manager - Banking - London - £650

    £600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

    The benefits of being in Recruitment at SThree...

    £18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

    Test Analyst - UAT - Credit Risk

    £280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Day In a Page

    Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

    The BBC’s wolf in sheep’s clothing

    What will Evan Davis be like on Newsnight?
    Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

    Finding the names for America’s shame

    The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
    Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

    Inside a church for Born Again Christians

    As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
    Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

    Olivier Rousteing is revitalising the house of Balmain

    Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
    Cancer, cardiac arrest, HIV and homelessness - and he's only 39

    Incredible survival story of David Tovey

    Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little