Changes To Credit Card Rules Agreed
Credit card users are to be given better protection from debts that spiral out of control
, although these changes are a watered down version of the original proposals.
The new changes will allow consumers up to 60 days to reject interest rate changes applied to their existing debt, as well as being able to opt out of credit limit increases.
The agreed changes came after the government revealed its original proposals to the credit card industry with a strident 230-page defence of its methods.
One of the original proposals aimed at raising the minimum amount that borrowers must pay off on their credit cards each month has been dropped.
All existing credit card accounts will remain the same in terms of their current rules on the level of monthly minimum repayments, which varies from one lender to the next.
However, all new credit cards will be subjected to a new rule meaning that monthly repayments must at least cover the interest accrued plus any fees and charges and an additional 1 percent of the amount spent.
The Consumer Minister Kevin Brennan said: "In our consultation it was made quite clear by consumers that they might not be able to manage their current debts if they had to pay off more each month."
"People with several cards would have had less flexibility to deal with their debts," he added.
There are currently around 30 million UK credit card customers, between them holding around 58 million cards.
The industry claimed that 62 percent of all adults living in the UK own at least one credit card, but the rate of borrowing on these cards has been in "gentle decline" over the last 5 years.
Last year the government made it clear that the credit card industry must "clean up its act", but the group that represents lenders devised its own proposals designed to help customers.
The new changes will come into affect by the end of January next year at the latest.
These include:
* Using any repayments to cover the most expensive debt on a credit card first
* A new 30-day window that will allow people to opt out of increases to their credit limit
* A ban to ensure that those in financial difficulties are not offered an unsolicited rise to their credit limit
* A 60-day period allowing people to reject interest rate changes on their existing debt. If they do choose to reject it, the credit card account must be closed, giving a "reasonable" amount of time to ensure all existing debts are cleared or moved across to another lender.
* Regular minimum payments being met with further information from the lender.
Consumer Minister Kevin Brennan said: "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."
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," she added.
The industry has estimated that the new changes will cost 533m over the first two years.
The government previously backed down after initial proposals for a total ban on unsolicited changes to credit limits, and also accepted that in some cases, debt should be re-priced based on the level of risk.
But it did manage to persuade the industry to make a key change to current practices - ensuring that when customers make repayments, the most expensive debt is paid off first.
This would reduce the amount that borrowers would have to pay off and cut the amount of time required for some to clear their credit card debts. There are currently very few lenders that ensure the most expensive debt is given priority and cleared first.
Liberal Democrat's Business spokesman John Thurso said: "Credit card interest rates have been hiked to their highest levels since June 2006 despite the fact that interest rates have bottomed out at 0.5%. We need a maximum interest rate put in place to end this profiteering.
"It is right that the most expensive debt should be paid off first but the government's lack of action on minimum repayments means that credit card debt will still take decades to repay.
"On average, a 10,000 debt repaid at the minimum rate will still take more than 35 years to pay off."
by: Sam Gooch
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