There is more change afoot in the lending market as the borrowing revolution continues to take shape.
New EU rules on credit cards and loans that come into force today mean fewer borrowers will get the best rates but the regulations give you greater flexibility when clearing loans.
These come on the back of a separate credit card overhaul in January (see below).
Here is a round-up of today's changes:
- Loan lenders must let you overpay. If you've spare cash you can overpay each month to clear the debt quicker. Providers can charge you up to 1% of the overpayment (if there's at least a year of the loan term left) or 0.5% (if under). Before, the only flexibility you had was to pay the loan off in full early, usually at a cost of one month's interest, which still stands.
- 14 days to cancel new cards & loans. The time you've got to rip up credit agreements has doubled from seven to 14 days. However, the initial application will still be on your credit file, which could dent your record (read Don't just cancel cards).
- More rights if your supplier goes bust. If you pay between £30,000 and £60,260 the lender is liable where it is linked to the supplier. This only applies to finance or a loan provided by a supplier or where you are given a loan for a specific purpose, as written in the credit agreement. Given the sums involved, will usually apply to household renovations or expensive cars.
The new section 75(a) of the Consumer Credit Act (CCA), under which this covers you, stipulates you must first try to sort the problem with the supplier before claiming from the lender. Consumers could already claim from their credit card company, under section 75 of the CCA, if they bought an item or service that cost between £100 and £30,000 that didn't arrive or was not as described.
- Only 51% will get the rate lenders brag about. Pre-1 February, if a loan or card provider advertised a 10% typical annual percentage rate (APR), two-thirds of successful applicants got it – the rest paid more. This was already a problem, yet EU regulations mean just 51% of applicants will get the new representative APR, as it's now officially called.
Worse, to know your rate you must apply. Yet that hits your credit file, so if the rate you're given is too high, getting cheap borrowing elsewhere is tougher. The aim was to improve other country's systems, but it's actually harmed our protection.
- They can still shut your account down. Card companies have always been able to demand you repay in full whenever they want – now they must give two months' notice rather than a week. But that still means you could be asked to repay your plastic debt at short notice.
January's credit card changes
Last month's shake-up saw the voluntary Lending Code – that most providers adhere to – give consumers double the time (from 30 to 60 days) to reject interest rate hikes. If you take this option you cannot spend on the card again.
In addition, your repayments must clear costlier debts first. Previously, providers could use your payments to clear cheap debt (eg, a balance transfer) first leaving more expensive balances (such as spending) trapped, accruing interest (see the Credit card trap ends MSE News story).
Credit card lenders must also ensure minimum monthly payments cover at least 1% of the outstanding debt plus all charges for new customers in a change that will be phased in by March.
However, it still leaves consumers open to the minimum payment trap, partly because it doesn't apply to all cards.
For those it applies to, this often locks borrowers in debt for years as repayments (typically 2% of the debt) are set low so you barely repay any debt, while the amount you repay falls as you clear more of the balance.
We've rebuilt our minimum payments calculator to show the huge gains from using a fixed payment, rather than your lender's stated minimum (see the Danger! Minimum payments guide).
Further reading / key links