Interest rate caps for store cards on way in bid to ease debt nightmare

EXCESSIVE interest rates charged on credit and store cards could be capped under government plans to help people who run into difficulties with debt.

Unfair bank charges will also come under scrutiny in a review of consumer borrowing launched by the government's Department for Business, Innovation and Skills (BIS). Among the proposals are a seven-day cooling off period for store cards; rules requiring credit card providers to provide electronic statements helping consumers to compare credit cards; and a cap on interest rates.

A similar cap on the interest rates charged by high-cost credit providers such as payday loan lenders was rejected by the Office of Fair Trading this year.

The review will also look at ways of improving the existing insolvency regime to clarify the options available to debtors.

Edward Davey, the consumer minister, said: "Well-informed, empowered consumers are central to our vision for how a credit market between customers and lenders should work. I want to encourage both to take responsible decisions and to strengthen protection where necessary - particularly for the most vulnerable."

Credit card rates currently average 16.7 per cent, the highest since early 2002, with the cheapest rates virtually out of bounds to borrowers without perfect credit records. The review will also target the store cards issued by retailers including Argos, Debenhams and Marks & Spencer.

It is estimated there are more than 13 million store cards in the UK, with interest rates typically between 19.9 and 29.9 per cent. A rate of 29.9 per cent would add 75 to a 250 purchase if the balance is not cleared promptly.

Joanna Elson OBE, chief executive of the Money Advice Trust, welcomed the review. "The consumer credit and insolvency markets need closer scrutiny. There are a range of issues regarding the debt remedies available and how debts are enforced which the government has rightly identified as ripe for change."

But Fiona Hoyle, of the Finance & Leasing Association, warned of unintended consequences for consumers.

"As the government points out, the Office of Fair Trading recently drew attention to the likely adverse impact of interest rate caps. The consequences of a 'cooling off period' for store cards in addition to the new EU-mandated right of withdrawal need equally careful consideration," said Hoyle.

"We welcome the government's recognition that unnecessary regulatory burdens should be avoided and share their view that consumers should be properly informed and financially capable."

The BIS will also take evidence from members of the public through a survey on its website - www.bis.gov.uk/consumer-credit - that will cover issues such as consumer knowledge of debt advice and credit agreements.