Teresa Hunter: Credit clean-up still leaves card companies with the winning hand

Published on Saturday 20 March 2010 12:43

TO MOST of us, promises from credit card companies to clean up their act are of dubious worth.

And so it is with the new lending code announced last week, after an agreement with government over abuses in the plastic industry.

My first objection is the code will not be enacted until the end of this year. Why the delay, given we now own a huge chunk of the UK banking industry? If consumers deserve better protection, then they need it now.

Secondly, there are no plans to prevent card companies arbitrarily increasing interest on your debts, because in their view you have become a bigger risk. This is a licence to print money.

During nine months last year, at the height of the credit crunch, around 6.5 million card customers saw their interest rate suddenly increase out of the blue, because of, or so they were told, a "deterioration in their risk profile".

What twisted logic. Bank bosses wreck the economy, and then charge their victims more, because their financial future now looks less secure.

Thirdly, there are no new controls to stop them automatically increasing customers credit limits. Where customers face financial difficulty, they must not be offered more debt. But as far as the rest of us are concerned, it's business as usual.

True, we can now at least opt out if we don't want the money. But many customers find such temptation irresistible. They are of the school if you don't believe money can buy you happiness, you simply don't know where to shop.

There are some good developments in the code, such as always ensuring the most expensive credit is paid off first. This was necessary after card companies launched accounts with zero interest on, say, transfer balances, but charged perhaps 19 per cent on purchases.

When you made partial repayments at the end of the month, the zero balance was reduced, leaving customers paying maximum interest. In future, the cheapest loan lasts the longest. It'll cost them 266 million in lost revenue this year. Or rather it would, if they implemented the changes.

The moratorium until early next year gives them ample opportunity to boost their revenue with new wheezes. Virgin led the march on Friday, by reducing its zero interest offering by two months from 16 to 14 months.

Cash and carrier

One area where the British Airways staff and management appear to have reached agreement is over the future of the pension scheme, which has a 3.7 billion deficit, dwarfing the air carrier's 2.7bn value.

But it is hardly good news for staff. They are to be allowed to keep their final-salary pension in return for increased contributions of 13 per cent of salary. That is quite some hit.

The company meanwhile pays in no extra and maintains its current 330m annual contribution.

There's no guarantee this agreement will get off the ground, as it must be approved by the Pensions Regulator, who may conclude that the deficit is being understated, as some commentators claim, and require more money still to be found.

Which will be a case of "fly me to the moon" to find it.

Best guessing budget

A few more days and the budget will be upon us, and it is anyone's guess what will be in it.

Last week, we were sceptical of Treasury Secretary Liam Byrne's claims that there would be no new tax increases under Labour. Rightly so, as it turned out, because he later back– tracked, after Chancellor Alistair Darling said no chancellor could ever rule out tax hikes.

Then that twizzle-headed marionette Mandelson joined in. First Peter showed his sad face indicating that taxes would rise if the economy so dictated, before flipping round to his happy face and adding ... oh no they wouldn't.

The budget appears to be a moving target, then, yet not so fast that it escaped a direct hit from Brussels which condemned the government's plans for reducing the deficit, saying they did not go far enough.

But the government's luck broke on Thursday, when the borrowing came in lower than expected at 12.4bn for February. At this rate, government debt for the year might only reach 131.9bn rather than the 178bn forecast.

This eases the pressure on the Chancellor significantly, and potentially leaves some wiggle room for a small giveaway on Wednesday.

He's just put VAT and stamp duty on houses up again, so he won't touch those. He could fiddle with tax credits or the personal allowance. But as these won't reach the pay packet until the eve of the election, why bother? They won't buy any votes.

I'd say we're in for a "steady as she goes" ride, which is just as well. Anything else would be a poisoned chalice.