Credit card reforms on the way, says governmentWhich? welcomes clampdown on credit card tricks
27 October 2009
The Department for Business, Innovation and Skills (BIS) has today published its credit and store card review promising to tackle rising APRs, low minimum repayments, unsolicited credit limit increases and negative orders of payment.
UK consumers have £230bn in debt on credit cards, loans, store cards and other credit deals. Following the government's consumer white paper earlier this year, the new consultation will examine several practices used by credit and store card providers that are detrimental to consumers.
The main credit card changes explained
Order of payments
When you use your credit card for different purposes (such as purchases, balance transfers and cash withdrawals), the interest rate you are charged for each varies. Because of a system known as the negative order of payments, when you make a repayment, it is usually allocated against the cheapest debt first, leaving more expensive debt (such as cash withdrawals) on your card attracting interest at rates of up to 27.9% until cheaper debts have been paid off in full. Only Nationwide and Saga currently operate a consumer-friendly order of payments.
The government will review the low minimum repayments imposed by most card companies. Paying off £3,000 on a credit card with an APR of 16.9% at just 2% of your balance each month would take as long as 33 years. Making a repayment of £100 a month instead would mean the debt is repaid in just over three years and you'll save over £4,000 in interest charges.
Increased credit limits
While no-one can force you to spend on your credit card, if your card provider increases your credit limit without asking, many consumers will be tempted to use the extra spending power, particularly during a recession when finances are tight. The government review will consider if this practice should be allowed.
The government will look at how and when card providers are allowed to put up the interest rate on your card. One proposed option is that card companies could only increase your interest rate if it costs more than it used to for the credit company to lend people money or your personal level of risk for the credit company changes. The card provider would need to offer an explanation for the increase.
Confusing advice that's hard to understand
The BIS review proposes the introduction of an annual summary of how you're doing with your credit card debt. The summary could help you work out how to avoid paying too much interest and help you compare your card with other ones to see if you’re getting the best deal.
Different cards that are difficult to compare
Which? research shows that the biggest 20 credit card providers use 12 different methods when calculating interest. This makes comparing cards very difficult.
The new BIS document proposes introducing a 'simple credit card' that's easy to understand. BIS has invited consumers to comment on this and other ideas. It has also floated the idea of credit card labelling to show
the good and bad points of credit cards. This could help people pick a credit card that's right for them.
Which? welcomes new credit card plans
As the Government announces proposals to give credit and store card holders a better deal, Which? personal finance campaigner, Phil Jones, says: 'For too long, card companies have been allowed to apply the tricks of their trade to the detriment of millions of consumers.
'We think it’s simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible. The sooner these practices are stamped out, the better.'
Launching the proposals, Consumer Minister Kevin Brennan said: 'Card companies have to get their act together and do more for consumers.
'The Government is putting forward new measures today which we believe will give consumers a better deal. I want to hear from the most important people, the customers, about their experiences and to get their views on our proposals. My opinion is clear, the current relationship between card companies and consumers cannot go unchallenged. We need to put the customer back in the driving seat.
'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.'
Tell Which? what you think of your credit card provider
Visit the new Which? banking campaign website Britain Needs Better Banks and tell us what you think of the UK banking sector and what changes you'd like to see. We'd also like to hear your personal experiences of your bank or credit card provider.
To find out which credit card providers offer the best service to their customers, check out our exclusive Which? credit card satisfaction report. And find the best card for you with Which? Best Buy credit cards and our free guide to choosing a credit card.
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