The Co-op will punish credit card customers who legitimately reject an interest rate rise by demanding they repay costly debts in just six months. Otherwise, they must accept the initial hike.

The group's banking arm, often popular for its good customer service, has been accused by customers of breaking the spirit of new rules designed to protect consumers against large rate rises (see the Reject Rate Jacking guide).

Under new terms, if a Co-op customer rejects a rise but fails to repay the debt in time, they will have to pay the increased rate, which can add hundreds of pounds to costs.

Those with thousands of pounds of debt are unlikely to be able to afford full repayment in six months so will end up on the increased rate.

Card companies are allowed to hike credit card interest rates but you can continue paying the existing rate if you opt-out of the jump within 60 days of receiving notice. This time frame was doubled from 30 days at the turn of the year.

By taking this option, consumers can no longer spend on a card. Rules agreed between the Department for Business, Innovation and Skills, and the credit card industry last year, state consumers must then be given a "reasonable" time to clear existing debts.

UK Payments, a trade body for card firms, says that loose definition means card providers can set payments at different levels.

Co-op's six-month rule does not fall in line with industry standards.

Credit card giants American Express, Barclaycard, Lloyds TSB and MBNA all allow customers who reject a rate hike as much time as necessary to clear payments, as long as borrowers keep up-to-date.

Cost hike

One forum user Paulgonnabedebtfree says: "It seems to go against the spirit of the anti-ratejacking stuff.

"If I have a large debt and it increases the rate but I'm unable to pay more than the minimum payments, it will have effectively forced the increase onto me."

Co-op's new terms and conditions, effective from 1 February, state: "Where a change in interest rate is to your disadvantage you may, within 60 days, notify us you wish to close it without paying the extra interest.

"Here, you need to repay any outstanding balance within six months.

"Where you use your account or do not repay any outstanding balance within six months you will be taken to have accepted the change in rate and the new rate will apply to you."

A cardholder with a £3,000 debt who makes a 2% minimum payment would pay £60 a month.

If the debt must be repaid in six months, assuming a 20% rate, they would pay about £550 a month by spreading payments evenly.

If a card company wants to increase the rate from 20% to 30%, as is typical, on a £100 monthly payment, the same customer would pay £1,974 in interest, rather than £1,046 on the lower rate.

It would also take four years and two months to clear instead of three years and five months. It's wise to make more than the minimum payments if you can afford to (see the Minimum Payments guide).

Complain to the Ombudsman

Wendy Alcock, money analyst, says: "It's disappointing to see Co-op taking such as a hard stance on the repayment of its rate-jacked debts only weeks after the Government strengthened consumers' rights to reject rises.

"Co-op usually has a good customer service record and we would encourage anyone who feels the repayment period is not reasonable to complain and contact the Financial Ombudsman Service, if required."

You need to wait at least eight weeks after a complaint to a firm, or for a rejection letter, before complaining to the Ombudsman – the independent disputes arbitrator.

The Co-op says it will consider requests for more time to pay from those in hardship on a "case-by-case" basis.

A Co-op spokeswoman says: "We believe six months to be a reasonable length of time to allow our customers to pay off the remainder of their balance."

Further reading/Key Links

Rate hikes: Reject Rate Jacking
Cut credit card debt: Best balance transfers