Crunch time for credit card firms in move to tackle debt mountain

Published on Thursday 2 July 2009 18:57

THE government has set out wide-ranging reforms for the credit card industry to try to cut the number of people struggling with unsustainable debts.

The proposed clampdown will mean a ban on unsolicited credit card cheques, while lenders will no longer be able to raise borrowers' credit limits without their consent, or raise interest rates on existing debts.

Ministers will also look at whether minimum monthly repayments should be increased to help people repay debt quicker, and at the order in which debts on cards are repaid, to ensure the most expensive are paid off first.

The white paper also contains measures to strengthen people's rights, including appointing a Consumer Advocate to help those affected by scams get their cash back and lead group court actions on consumer issues.

Unsecured borrowing in the UK has soared in the past decade, with consumers collectively owing more than 230 billion on credit and store cards, overdrafts and loans.

But several practices employed by credit card providers are making it harder for people to pay down their debts.

These practices include setting monthly minimum repayments at a level that would generally take consumers about 25 years to clear their balance.

The majority of lenders also use repayments to pay down debts that incur the lowest interest rates first, meaning money on a 0 per cent balance transfer deal will be paid back before cash advances attracting interest of about 25 per cent a year.

Under the planned reforms, expected to come into effect next spring, credit card firms will also no longer be able to send out credit card cheques to borrowers unless they request them. The blank cheques can be used like personal cheques, with the value of the transaction added to the borrower's card balance. But the interest charged is typically far higher than for a purchase made using a card, often 28 per cent rather than about 17 per cent.

Borrowers using the cheques also incur handling fees of 2 per cent of the value of the transaction, while there is no interest-free period and consumers do not get the same level of protection on purchases as they would if they had used their card.

Andrew Hagger, of Moneynet. co.uk, said: "Credit card cheques have wreaked havoc with the finances of unsuspecting credit card customers for years."

There will also be new requirements for all lenders to check consumers' credit worthiness before they advance money to them and to explain financial products fully, as well as curbs on excessive fees and charges.

Meanwhile, the Office of Fair Trading said it would carry out a review of the 35bn-a-year, high-cost credit market, under which small sums of money are lent over a short period to people who would have trouble getting credit elsewhere, often at interest rates of 50 per cent APR.

The Finance & Leasing Association warned that, overall, some of the proposed changes could see consumers facing reduced credit availability and higher prices.