Unsolicited credit card cheques are to be outlawed as part of a major government clampdown on credit card and store card providers.
Business Secretary Lord Mandelson this morning unveiled a raft of measures to protect consumers getting further into debt as part of Westminster’s Consumer White Paper.
While the credit card cheque ban will happen, subject to Parliamentary approval, the Paper includes other proposed measures a step further away from being ratified, such as preventing lenders automatically increasing credit limits.
Cheques won't be banned completely, though from next year you'll need to request them, if required.
The danger to consumers comes when lenders send usable blank cheques without warning to tempt you into further spending. You're charged a fee if you use one, the interest rate is high, while there's usually no interest-free period.
It's estimated 280 million are issued every year at an average 27% interest, ten percentage points higher than typical credit card borrowing rates.
The Paper also revealed the Office of Fair Trading (OFT) will review whether sky-high interest-rate loans, typically charging above 50% interest, should be banned. These are often sold by door-step lenders.
While the moves have been welcomed, consumer groups question why it's taken the government so long to spot these industry problems.
As a nation, we owe £54 billion in credit card debts. If you want tips on cutting such debt, the Best balance transfers and Credit card shuffle guides can help.
The headline move, the ban on un-requested credit card cheques, should come into force midway through next year, though it is still subject to Parliamentary approval.
The Financial Services Authority’s website will also host a new, impartial credit card comparison table in the next few months.
The government wants to appoint a 'Consumer Advocate' responsible for coordinating work to educate consumers and to help them get their money back when things go wrong. The proposed role is similar to what MoneySavingExpert.com already does. See Martin's blog on this subject.
The White Paper also laid down proposals that are still a stage away from being presented to Parliament for approval. A consultation over these plans will begin in late summer but it is not yet clear when any legislation, on the back of it, will come into force.
Included in the consultation is the following:
Whether restrictions should be placed on credit limit increases.
If minimum monthly repayments should be raised. Last week, we revealed Barclaycard is set to reduce minimum payments for many which could add years to borrowers' debts.
What order debts built-up on a card should be paid off. Many lenders use monthly payments to pay cheap debt off first, such as a 0% balance transfer. That leaves any expensive debt trapped, accruing interest.
Whether lenders need to improve checks on consumers’ creditworthiness before they lend.
If lenders need to explain financial products better, including the consequences of missing payments.
Whether lenders are complying with new OFT guidance to tackle irresponsible lending.
Better late than never
Martin Lewis, MoneySavingExpert.com creator, says: “It’s taken a massive credit crunch and years of over-borrowing for the government to finally start dealing with the seismic problems in the credit card industry.
“None of the issues faced are new. The phrase ‘shutting the stable door after the horse has bolted’ springs to mind.
“Yet better late than never. These are important proposed changes, and hopefully they will work. We should all party at the thought card companies won’t be able to send out hideous cheques to tempt people in at penalty interest rates.
“And anything that stops expensive store cards being pushed at the young with easy promises and hard repayments is welcome.”
Peter Vicary-Smith, head of consumer lobby group Which?, echoes those sentiments: “Many of the measures outlined in the White Paper are overdue but welcome. The important thing is that no time is wasted in turning these proposals into tangible benefits for consumers.”
What about financial education?
Lewis also questions why nothing has been proposed to improve consumers’ awareness of credit cards.
He adds: “It’s a shame there’s no real mention of compulsory financial education. We live in a debt-illiterate nation. Tackling this is the core priority. No-one should be allowed to leave school without understanding how credit card minimum repayments work.
“It should be taught after GCSEs, and before that summer term ends. It’s the moment children move towards consumer adulthood. A fortnight of lessons would make all the difference.”
He also issues a warning about the proposed FSA comparison tables.
“It’s interesting to see the FSA’s proposed credit card comparison. MoneySavingExpert.com has deliberately never used or linked to credit card comparison tables or services as they’re often a misleading tool.
“Credit cards are complex, and even two cards at the same rate can work differently. It’s not just about choosing the right card for the right purpose, it’s about then using it the right way.
“It’s to be hoped its tables address these issues rather than just providing another long list. Though the real challenge for it will be to keep up with all the cards and how it lists them.
“Many companies now offer multiple versions of cards and then each card has different rates depending whether you apply in branch, online or by phone – the variables are huge.
“Yet if the regulator is going to deliver, it’s important it includes them all.”
Further reading/Key Links
How to get help: Debt problems
Cut credit card debt: Best balance transfers