New credit card rights to help consumersChanges could save card holders £300m a year

15 March 2010

Credit card

An agreement between the government and the UK’s credit and store card companies will soon lead to improved rights for credit card users, it has been announced.

The move comes after examination of feedback on last year’s government credit card consultation from the public and consumers organisations including Which?, and negotiation between the government and credit card companies.

Prime Minister Gordon Brown commented: ‘These new rights will put an end to the irresponsible lending practices that people have been most concerned about, and help cut the cost of borrowing.’ The government estimates that the announced rule changes will save consumers almost £300m a year, while Nationwide Building Society predicts the new regulations could keep more like £500m in people’s pockets.

The key changes agreed will be introduced by the industry this year and given statutory force ‘as soon as possible’, the Department for Business, Innovation and Skills says.

Credit card rights: what’s going to change?

1. Positive allocation of credit card payments

Currently, most firms operate a ‘negative payment hierarchy’ or adverse order of payments, which means that if a consumer holds debts at different interest rates on their card, the cheapest debt is always paid off last.

Often, this hits borrowers who have made 0% or low-rate balance transfers to their cards and then have also used them for purchases: borrowing that is likely to be charged at the lender’s standard APR.

Under the new rules, companies will have to allocate customers’ credit card payments ‘positively’, so that their most expensive debts are paid off first. According to Nationwide, which already allocates customers’ credit card repayments fairly, this could save a typical borrower with a 0% balance transfer card £224 in their first year.

2. No more unsolicited credit limit increases

Measures to prevent customers in financial difficulty being offered unsolicited credit limit increases will also be brought in. Any other customer offered a credit limit increase they have not requested will have 30 days to reject this, as well as the right to opt out of credit limit increases in future.

3. The right to reject rate increases

Consumers will be given 60 days to reject proposed increases to the interest rate charged on their existing debts.

4. More information on credit card monthly minimum repayments

Credit card monthly minimum repayments (MMRs) are often set at such a low level that even relatively modest debts could take consumers decades to repay. Under the new rules, credit card providers will not be forced to increase the MMRs they charge customers, but will be required to make clear that this is the most expensive way to pay off a credit card.

Firms have also agreed that for new credit card customers, the MMR charged will always cover at least interest, fees and charges plus 1% of the outstanding card balance.

5. The right to compare

Companies have also undertaken to send credit card customers annual statements detailing all fees, rates and charges so it is easier for people to compare their current credit card deal with those on offer from other providers.

The Which? verdict

Which? chief executive Peter Vicary-Smith said: ‘The government’s plans to enable credit card users to pay off their most expensive debt first are a move in the right direction, but there is still more to be done to ensure vulnerable consumers are protected.

‘It’s now time for industry to step up to the challenge and offer credit card users clearer and fairer terms and conditions, and weed out irresponsible lending practices.’

If you’re on the lookout for a better credit card deal, be sure to check out the Which? credit cards review. We’ve examined cards to suit every kind of consumer – from those in need of a 0% balance transfer to people looking for the best cashback credit card.

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