New rules to speed up payment of credit card debtsMost expensive debts to be paid off first

01 January 2011

Store cards for high-street credit

Many high-street retailers offer store credit cards

Under new rules that come into force today, credit card companies must treat their customers more fairly – giving them greater control over their credit limits and the interest rates they pay, as well as enabling them to clear outstanding debts more quickly.

The changes apply to all credit card providers. Among the new rules is an end to the negative order of payments (or ‘negative payment hierarchy’) that many lenders have imposed on their customers.

Many credit card providers charge different rates of interest for different types of debt held on the same card, for example, cash withdrawals or over-the-counter transactions can attract a far higher rate than low-rate or 0% balance transfers. Under a negative order of payments, companies allocate any money a customer might pay off their card to the cheapest debt first – leaving the most costly debt trapped at the bottom of the hierarchy, racking up interest.

Under the new rules, repayments will have to be used to pay off the most expensive debt first, which could save some consumers significant sums in 2011.

Which? debt and credit card expert Martyn Saville commented: ‘This is an important step in the right direction for consumers. Which? has spent years arguing for an end to the negative order of payments and, now this is finally happening, many people will benefit from a fairer, faster system for paying off debt.’

Minimum credit card repayments to increase

Other notable changes include an increase to the minimum monthly repayment (MMR) that will be demanded on all new credit cards. Many card providers set the MMR so low that customers’ repayments barely cover the interest they're being charged on existing debts.

From now on, whenever you take out a new credit card or store card, your lender will require you to pay off at least the interest charged each month on your outstanding balance, plus 1% of whatever you owe.

And, following a survey by the Department for Business, Innovation & Skills - that more than half of consumers opposed unsolicited increases to the credit limits on their credit and store cards - lenders will now have to tell customers about any increases at least 30 days before they happen.

Your right to reject credit card rate rises

If banks want to increase the interest rates existing customers are being charged on debts, they must now give individuals 60 days to accept or reject the change.

If a customer does not accept the rate hike, he or she can choose to close the credit account and pay off what is left in instalments, rather than a single lump sum, at the current interest rate. If a customer is struggling with their account, the bank will not be allowed to raise the interest rate at all.

Martyn Saville said: ‘This is a crucial move that will help anyone who is feeling financially squeezed, or who simply doesn’t wish to accept paying more for their existing borrowing. However, don’t forget you can switch credit cards at any time and may save a lot of money by transferring your balance to a card with a 0% offer or a long term, low rate card. You can find the best deals by reading the Which? credit card review, and work out how much you could save by using the credit card switching calculator.’

Credit card complaints

These credit card changes have been implemented by BIS with the co-operation of the credit card industry, but it's hoped they will be enshrined in law later this year.

If your credit card company doesn't follow the new rules, you can complain to the Financial Ombudsman Service, which can force the card company to give compensation.

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