Fairer Rules proposed for Credit Card companies

27-Oct-2009

The government today announced a series of reforms designed to tackle the growing problem of credit card and store card debt.  The proposed changes include improving debt repayment policies and banning the increasing of card credit limits without the card holder's prior consent, among other measures.

The action is being taken as credit and store card companies are accused of imposing "complex and confusing terms and conditions that can leave people baffled" and of increasing credit limits and interest rates without giving consumers fair notice or explanation.  There are already plans in place to ban credit card companies from sending out unsolicited credit card cheques to card holders.

Consumer Minister Kevin Brennan said:  "It is not acceptable for card companies to impose complex and confusing terms and conditions that can leave people baffled, or to increase interest rates without a proper explanation.  Consumers have a real responsibility to manage their finances properly, but they also have a right to clear information to enable them to do that.  Consumers should not feel each month as if they've been exploited or disadvantaged."

A document has been published today laying out the proposed changes to the laws governing debt repayment.  One of the key proposals is to change the rules about the order in which debts that build up on a credit card are paid off.  The policy on repayment at most credit card companies is that the lowest interest debts are paid off first, which of course means that the consumer pays more interest on their debts for a longer period of time. 

New rules have also been proposed for the percentage of the actual debt that credit card companies must charge each month as the minimum payment.  Currently card companies are able to charge as little as 2 per cent of the outstanding balance, a figure that will just about cover the interest that is charged. 

This means that if a consumer pays off just the minimum balance each month, they are unlikely to ever clear their debt.   The plan would be to raise the minimum repayment to 5 per cent of the outstanding balance, helping consumers to escape from the minimum payment vicious cycle.  The suggested alternative would be to set a time scale within which the full balance had to be paid, and to set the monthly minimum accordingly.

Other measures include changing the regulations so that consumers can pay off the higher-interest debts first, rather than paying off the cheapest debts and being left with unmanageable interest repayments as a result.  The practice of increasing a cardholder's interest rate without any proper explanation has come under fire, and the government has suggested that limitations should be imposed on the amount that the interest rate can rise. 

According to the proposal document, credit card companies 'have agreed that they shouldn't increase your credit limit more than once every 6 months'.  However, credit limits where the consumer has expressly asked for them are one thing, but unsolicited interest rate rises on existing debt are quite another, so a distinction has to be made. 
 
Fairness, transparency and a sense of understanding are desperately needed in order to help UK consumers manage the £230 billion of debt from credit cards, store cards and personal loans that has built up.  Ultimately we are all responsible for the personal debt that we incur, but it's important that the credit card and store card companies do not actively work to keep consumers in debt.