Credit card lenders forced into fair charges

The Government says the plans, exclusively revealed by MoneySavingExpert.com on Friday, could save consumers £300 million a year, while Nationwide Building Society estimates the figure could be £500 million (see the Card crackdown MSE News story).

Under the moves, lenders must use repayments to clear your most expensive debt first so it's not trapped accruing interest, credit limit increases will be curbed and there will be tougher rules on lenders hiking interest rates.

The measures have been agreed following negotiations with card companies and feedback from consumer groups such as MSE (see the MSE credit card submission).

The key changes will be introduced by the industry by the end of this year and given statutory force "as soon as possible". Consumer Affairs Minister Kevin Brennan says regardless of the upcoming election result, the clamp down is binding.

There are fears lenders may hike other charges to recoup lost revenue or end attractive balance transfer offers.

The measures include:

• Repayments will clear the highest rate debt first. At present, most lenders, other than Nationwide, apply payments to cheap debt first (such as a balance transfer) meaning expensive debt (such as spending) is trapped accruing interest at a rate of knots.

• Lenders will be forced to explain the impact of only making minimum payments in big and bold language.

• The minimum payment on new accounts will always cover at least interest, fees and charges, plus 1% of the debt.

• Consumers will have the right to choose not to receive credit limit increases and the right to reduce their limit at any time.

• Borrowers will get more time to reject increases in their interest rate. Even now, if your lender hikes the APR, you can refuse it, though you'll no longer be able to spend on the card (see the Reject rate-jacking guide).

• Lenders will send annual statements detailing all charges.

• Those in financial difficulties will be protected through a ban on increases in their credit limit as well as the ban on increases in their interest rate.

While some of the more complex changes, that require an overhaul of lenders' computer systems, such as the change to how payments are allocated, may not happen until the end of the year, we understand some of the more simpler changes may take place sooner.

These include a curb on limit increases and more time to reject interest rate rises.

Access to credit reports

While the major steps will stop many stealth charges on plastic, the Government has also announced other measures, including:

• Everyone will have access to their credit report online for a maximum £2 from June 2010. Currently, you are sent it by post, if requested. Access will be free for ID fraud victims and those receiving debt advice.

• Lenders must consider reducing or freezing interest and charges, and accepting token payments, from people who suffer a sudden income shock whether on a credit card or other type of borrowing.

• Those in serious hardship will get money advice to help them manage their debts.

Martin Lewis, MoneySavingExpert.com, gives his detailed views of the plans:

How big a deal is this? "This series of small steps slices credit card stealth charges in half. While I wish it'd been introduced twenty years ago, it'd be churlish not to recognise this one swoop incorporates many of the changes those of us who've been campaigning on these issues have been asking for, for an age."The most radical change is to debt repayment hierarchies. This nasty piece of commercial genius has allowed plastic providers to unfairly delve into their customers' pockets for years, possibly adding £500m to their annual profits. Yet it's so difficult to explain how it works, without this rule change, most consumers would continue to be duped."Now lenders will be forced to allocate people's repayments to clear the most expensive debts first, foiling their current attempts to deliberately structure deals such as 0% on balance transfers but 20% on spending; which effectively traps in the expensive debt so customers can't repay it, leaving it speedily accruing interest."How binding are the new rules?"Don't be fooled by the fact this looks like just an agreement with credit card companies. Its status is likely to be identical to the credit card summit of December 2008 rules which effectively binded card companies without it becoming statute."This is because the prime arbiter of such matters is the Financial Ombudsman which has the power to force companies to pay compensation. Its adjudications don't just need to be based on law, but also on standard industry operating procedures and codes of practice - even on companies that don't sign up for them. So these new rules are likely to effectively become compulsory."A very astute political move. "The may say the election's 'all about the economy, stupid!'. But, as put two economists in a room, and you get three different opinions, so working out what to do to have a direct impact isn't easy. Yet here the government is shifting the focus onto people's micro-finance where cause and effect are more closely linked."Whether it's reducing the cost of getting your credit files or giving people the right to reject rate rises, it directly impacts people's pockets at big companies' expense - a potent pre-election giveaway." Credit card minimum repayment mostly left alone"Currently, pay only the minimum repayment on a credit card at 17.9% interest and it'll take 41 years to repay at an interest cost of £6,300 (see www.minimumrepaymentcalculator.com), so a 25 year old would be near collecting their pension before it's repaid. "The Government wanted to increase minimum repayments, but was met by consumer objection. After all, higher mandatory repayments would leave some defaulting, and reduce the control over repayments for those with multiple cards. So, understandably, it's had to pull back from that, which I'm sure the card industry is patting down its forehead with relief about."Yet it does plan to introduce much better communication - we'd suggest everyone who makes only the minimum repayment getting a letter in font size 50 telling them how long it'll take them to repay. More is needed, though. Crucially, we need make it obligatory that lenders give consumers a series of repayment options other than the minimum such as a 'pay off in 3 years' amount - and the ability to fix repayments." Right to reject will help combat the 6m who've been rate-jacked

"Over 6 million people were rate jacked in 2008 adding a big whack to their debt repayment burden. The reason's quite simple: in the boom time, plastic providers salivated over putting cards in every pair of pants. Now they want to cherry pick - and while it's easy to avoid lending to unattractive new customers they've been left with many existing customers they'd love to get off their books.

"Their solution has been to jack rates for specific individuals in the hope they'd leave or at the very least contribute more revenue, effectively making it even more difficult to repay for those already in trouble. The first steps to fight it were launched at the December 2008 credit card summit, that gave consumers the right to 'close' their accounts if the card company raised rates.

"Yet this clumsy phrasing hid a powerful consumer tool. While closing an account doesn't sound helpful it actually meant that provided people agreed not to borrow more they'd be able to repay current borrowing at the current rate. Sadly, too few have used it, so I'm delighted the Government is adopting our 'right to reject' phrasing (see the

Reject Rate Jacking

guide).

"It's also adding strength to existing rules, increasing the time people have to reject rises and allowing them to reject even where the company is doing a wholesale APR increase, not just one bespoke to them."

Will the card companies just add charges elsewhere?

"It will be interesting to see the impact of this on the market, some will worry that the card companies will try and recoup the £500m cost of forcing them to ensure the most costly debt is repaid first from other transactions, and indeed there is a chance we may see a slight diminishing of the more competitive 0% balance transfer offers.

"Let's not forget at a time when base rate is at a 200 year historic low, credit card standard APR rates and personal loan rates are at near ten year highs, and providing they've got their risk controls right, it's likely they're already raking in windfall profits from these alone, never mind the billions extra made from ancillary products like extortionately expensive payment protection insurance.

"The hope is credit card regulation will now be run in a similar fashion to anti-avoidance tax rules where when companies introduce dodgy new schemes that cause consumer detriment they'll be kiboshed at speed."

Further reading/Key Links

How to get help: Debt problemsCut credit card debt: Best balance transfers