New credit card protection agreed

Credit card holders will be offered greater protection from spiralling debts, although the changes are watered down from original proposals.

Consumers will be given 60 days to reject changes in the interest rates charged on their existing debts.

They will also be able to opt out of any increases in their credit limit.

The agreement comes after the credit card industry met the government’s original proposals with a strident 230-page defence of its methods.

There are 30 million UK credit card customers holding 58 million cards.

The industry said that 62% of all UK adults had at least one credit card, but borrowing on these cards had been in “gentle decline” since 2005.

Agreement

The government told the credit card industry that it had to “clean up its act”, but the group representing lenders came up with its own proposals for helping customers.

The new agreement is a merger of the two, with the changes coming into force by the end of January 2011 at the latest.

They include:

  • Ensuring that the highest cost debt on a credit card is paid off first
  • A new 30-day window to allow people to opt out of any unsolicited increase in their credit limit
  • A ban on those in financial difficulties being offered an unsolicited rise in their credit limit
  • A 60-day period for people to reject a change to the interest rate on their existing debt. If they reject it, they must pay off their account within that 60 days.
  • Regular payments of only the minimum being met with more information from the lender.

“This is a fair framework of rights and rules that makes sure easy and convenient lending for the majority does not lead to unmanageable debt for the minority who may be in financial difficulty,” said Consumer Minister Kevin Brennan.

Melanie Johnson, who chairs the UK Cards Association, said: “We are pleased that our evidence on unsolicited credit limit increases and the re-pricing of existing debt has conclusively shown that existing practices do not need to be overhauled.

“We believe that, overall, the outcome of the review is balanced.”

The industry said that the changes would cost an estimated £533m over the first two years.

Cost of debt

The government backed down on initial proposals for a complete ban on unsolicited credit limit changes, and also accepted that on occasions debt should be re-priced depending on the risk level of the customer.

But it persuaded the industry to make the most significant change to existing practices – ensuring that the most expensive debt is paid off first.

This could cut the amount that borrowers will have to pay off and reduce the amount of time needed for some to clear their card debts. Very few lenders currently ensure that the most expensive debt on a card is paid off first.

Peter Vicary-Smith, chief executive of the consumers’ association Which?, 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 is 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.”

Some 61% of credit card holders pay off their bill in full every month.

source BBC.co.uk