David Prosser: Why bend to the plastic providers?

Outlook: The test of these rules will come not this year, but during the next expansion of consumer credit
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The Independent Online

Two years ago, credit card lenders backed down in a row with regulators over the excessive charges paid by customers who missed repayments or exceeded borrowing limits. Having subsequently seen the banking industry win its legal battle over an almost identical dispute, it is little wonder credit card bosses have more recently felt less inclined to cave in to watchdogs' demands.

So it is that new rules introduced yesterday governing the way lenders must treat their customers follow a period of fierce horse-trading since a new code of conduct was first proposed last year. And the resulting compromise is not an entirely satisfactory one for borrowers.

The big victory for consumer groups is that borrowers' repayments will henceforth have to go towards repaying their most costly debts first. That will finally put an end to the pernicious trap into which many borrowers have fallen when switching debt to a card with an interest-free introductory deal on balance transfers. Many of these cards then charge interest on new spending, but direct all repayments towards the balance transferred, making it impossible for borrowers to avoid racking up charges.

Less impressive, however, is the U-turn on unsolicited credit limit increases, which the Government had originally wanted to ban outright. Instead, borrowers will now have 30 days in which to ask for the rise to be rescinded. Why credit card companies should be allowed to go on pressing ever larger borrowing facilities on to customers who have not asked for them is anyone's guess.

The change of plan on minimum repayments is also a concern. Credit card companies that require borrowers only to repay a tiny percentage of their debt each month know that such rules mean they will continue earning additional interest on customers' accounts for years into the future. But rather than requiring lenders to insist on much higher repayments, the rule will now be that the minimum must at least cover interest charges and fees, plus 1 per cent of the balance, so that the total debt cannot rise in a month when no spending has taken place.

This halfway house is justified by the concern that higher minimum repayments might mean that more consumers default on their credit card accounts. That might be true where the rule was applied to existing debts, but there is no reason not to apply it to all cards taken out from now on.

However, the test of these rules will come not this year – borrowers, as a whole, are in the process of deleveraging, as recessionary fears and realities bite – but during the next expansion of consumer credit. When that arrives, it may well be that the rules on expensive plastic are once again found wanting.