Credit card costs set to soar under new rules

BORROWERS face fresh increases in credit card and loan costs after new unsecured lending rules are introduced next month, it has been claimed.

Credit card and personal loan costs last year hit eight- and nine-year highs respectively, even though the Bank of England base rate has been 0.5 per cent since early 2009, as lenders restrict the best deals to those with the cleanest credit records.

And there are further price rises on the way. Experts say regulations coming into force on 1 February will mean fewer borrowers getting the advertised rate on their loan or credit card.

Under the Consumer Credit Directive, which brings advertising of unsecured loans in the UK in line with EU rules, providers will have to display an interest rate that at least 51 per cent of customers will be offered.

Currently, lenders can only advertise a rate if they expect at least 66 per cent of borrowers to qualify. So it is likely that from next month fewer borrowers will be offered the advertised rate, and uSwitch.com research out today suggests two thirds of consumers will be deterred from applying for credit as a result.

The new rules will also force lenders to carry out more detailed credit checks on borrowers before entering into credit agreements or when increasing the level of credit. Additionally, from 1 February they must give prospective borrowers an explanation of the features of the proposed agreement, including the repayment amounts and the consequences of default.

However the extra requirements on lenders are expected to push their costs up, leading to higher interest charges.

Rod MacLeod, senior associate at Scottish legal firm Tods Murray, said: "Although many lenders will already carry out credit assessments before making the decision to lend or not, the new regulations will add to compliance costs if the discretionary element is removed, particularly if further checks are required each time credit limits are increased.

"The latest government figures estimate that the annual cost of compliance for businesses in this area exceeds 200 million so if compliance costs go up, credit becomes more expensive," he said.

The change will also make it even harder for borrowers to secure credit unless they have an unblemished credit history, he added.

"Lenders will naturally be more cautious of who they are lending to and borrowers should expect greater scrutiny of customer borrowing and spending habits," said MacLeod.

The average household faces unsecured debt repayments of up to 1,800 a year within the next four years, according to Steve Davies, head of retail and commercial banking at PwC in Scotland, due to interest rate rises and falling house prices.

"By 2015, we anticipate interest rates could rise by 2 to 3 per cent. The average household would need to find an extra 1,800 a year for interest payments alone - a significant proportion of disposable income," he said.