Ministers get tough on £53bn credit card industry

Crackdown on borrowing in campaign to reduce soaring personal debt
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The Independent Online

Some of the most aggressive tactics of the £53bn credit card industry will be outlawed in an attempt to curb "irresponsible" lending which has turned Britain into the debt capital of Europe.

The Independent has learnt that the Department for Business, Enterprise and Regulatory Reform (BERR) will stop lenders sending out millions of unsolicited credit card cheques and ban them from raising spending limits on cards without approval.

Ministers fear many customers are unaware that credit card cheques charge up to 27 per cent interest, carry far higher charges and offer less protection than normal credit card spending.

There is also concern that customers receiving higher "plastic" borrowing limits from major financial institutions may be encouraged to think they can afford the extra borrowing.

Credit card companies might also be forced to warn borrowers that they can seek permission from the courts to add a credit card debt to their home as a "charge" – a tactic which the Citizens Advice Bureau says has increased since the recession started. Consumer Affairs minister, Gareth Thomas, told The Independent: "We are concerned that people may be tempted to borrow irresponsibly if credit card companies increase borrowing limits without this being requested by customers, or send out unsolicited credit card cheques."

The minister – who would introduce the legislation – added: "It's vital we protect consumers at this time and we are exploring these issues carefully."

It is understood the Government will start consultation on the changes and look into the most effective way of legislating the proposals.

Although personal unsecured lending is now decreasing as workers fear for their jobs, Britain still has the highest personal indebtedness in Europe and in February the nation's outstanding credit card balance stood at £53bn.

Credit card cheques have been one of the credit industry's favourite ways of encouraging borrowing in recent years. Money borrowed by credit card cheques is typically charged at two to three percentage points above the "plastic" credit card rate and is also subject to a one-off transaction charge of up to 3 per cent. Interest is charged immediately, unlike up to 56 interest-free days on a normal credit card transaction.

Also unlike normal "plastic" transactions, purchases on credit card cheques do not enjoy "Section 75 protection" for faulty goods costing between £100 and £30,000. Fraudsters are also able to steal credit card cheques in the post and spend them without the borrower knowing.

A BERR source said: "There is worrying evidence that, rather than borrowing for discretionary purposes, consumers are using them for essential expenditure and to deal with cash flow shortfalls.

"Unfortunately, some consumers will take the view that since the lender has offered a [higher credit card] limit, then it must be affordable and within their means. We believe that it is right that we should seek to protect them from this risk."

The moves follow the introduction of a private member's Bill in the Commons which seeks to ban both unsolicited credit card cheques and lending increases.

The Labour MP Russell Brown's Lending (Regulation) Bill was "talked out" of a Commons session last month, but Mr Thomas says he is "sympathetic" to several of the Bill's aims and will introduce them in government legislation. Campaigners have welcomed the move. "We have been saying for a long time that unsolicited credit card cheques should be banned and we are concerned about credit limits being increased," says Moira Haynes, from the Citizens Advice Bureau.

According to the payment body Apacs, 68 million credit card cheques were sent out in the third quarter of 2008. But Apacs said that only 7 per cent of credit card cheques posted had been used.

Plastic: How they get us to spend

*Suggesting customer purchases

Pictures of sports cars or new kitchens accompany some card and personal loan mailings. Sainsbury's Bank has been telling clients they can spend credit card cheques on school fees or "a gift for a friend".

*Selling payment protection insurance

Lenders make huge sums from payment protection insurance (PPI) against unemployment or sickness. Hundreds of thousands of card-holders are believed to have been mis-sold PPI.

*Encouraging purchases overseas

Lenders promote how easy it is to withdraw or spend money abroad with plastic. But there is usually a cash advance fee of 2.5 or 3 per cent as well as fluctuating exchange rate charges.

*Charging more for cheques

Lenders charge much higher interest on credit card cheques than on normal transactions. Barclaycard Platinum charges 12.4 APR for card purchases, but one of its cheques has an effective APR of 27.9 per cent.

*Increasing credit limits without asking

Some people find their credit card limit has increased overnight. This was common when banks had extra cash to lend during the boom. There is evidence they are now cutting credit limits.