The government have announced a number of new 'consumer-friendly' credit card rules, but will the changes really help to make spending on plastic more manageable?
1. Order of repayment:
Credit card companies will soon be forced to allocate any repayments you make towards paying off the most expensive debt (the one that's earning interest at the highest rate) on your card first.
At the moment the vast majority of lenders use a negative order of repayment and put any payments you make towards clearing the cheapest debt (those that are earning the lowest rate of interest; 0% balance transfers for instance) before those attracting interest at a higher rate (such as standard rate purchases and cash advances).
This traps the high interest debts on your card, adding to your balance and costing you money until the cheaper debts are cleared completely.
If you mix different types of debt on your cards (which is generally best avoided) this alone will help you to clear your debt sooner and with less interest added to your original borrowing.
2. Minimum repayments:
While the government decided against making lenders increase minimum repayments across the board because of concerns over affordability, they did make a number of changes that should help to reduce the number of people falling into the minimum repayment trap. This all too common situation occurs when your minimum repayments are so low that more interest is added to your borrowing each month than you are paying off, so your debt actually grows over time.
However, once the changes take effect lenders will need to fix the minimum repayments on all new accounts at a level that will at the very least cover the cost of any interest, fees and charges added that month plus 1% of the outstanding balance. This will help to ensure that borrowers' debt decreases over time rather than spiraling out of control as a result of interest charges.
Warning messages will also be displayed predominantly on the credit card statements of those who customarily make only the minimum repayments. Lenders' will also be required to make their customers more aware of the issues and cost of only repaying the minimum each time they receive their statement.
3. Interest rate hikes:
Lenders will be required to give at least 60 days notice before they increase the rate of interest applied to a customer's existing credit card borrowing. They will also need to send you reminders twice during this period and provide an illustration that makes it clear what impact this will have on the total amount your debt will cost you.
This should, in theory, give card holders sufficient opportunity to reject the change, close their account (so they are no longer able to use the card to fund any further transactions, but that you should still be able to pay off the existing debt at the previous rate), and move their balance to a different card should they wish.
They will also be prevented from increasing the interest rate applied to the balances of those in financial difficulty. Credit card companies will be consulting debt charities in order to identify which borrowers will be identified as exempt from interest rate rises.
4. Unsolicited increases in credit limits:
Borrowers will be given 30 days' advance notice before any unsolicited increase in their credit limit is made. During this time they will be entitled to reject the increase should they wish. Card holders will also be able to ask that their credit limit is reduced at any time.
Additionally, applying an unsolicited credit limit to the accounts of those in financial difficulty will also be outlawed. Lenders will also be required to carry out a creditworthiness review before offering a customer a significant increase in credit limit.
5. Annual summary statements:
It's also been requested that lenders send out an annual statement to their customers detailing the current charges and cost of borrowing on each of their cards. Rather helpfully, they will be required to present the information in a way that will make it easy for consumers to shop around and compare their current deal with that available on other cards.
When will the changes take effect?
You can expect to see all of the proposed changes in force by the end of this year at the very latest. It's hoped that the smaller changes that don't require third party consultation or an update to lender's systems will be in effect sooner.
All in all, these changes represent a very positive move for credit card holders, particularly those who struggle to manage their credit card borrowing. However, the only concern now is what credit card providers will do to recoup the cost of these consumer-friendly changes to the way they treat debt.
