New rights and lower costs for credit card users
Prime Minister Gordon Brown has announced new rights for Britain's 30 million credit card users that will save consumers millions of pounds and give people more control over their finances.
The new rights were secured in an agreement between the Government and the credit and store card companies negotiated in the light of feedback from thousands of consumers to a Government consultation on credit cards. The key changes will be introduced by the industry this year and given statutory force as soon as possible.
Gordon Brown said: "Step by step, we are reinventing the financial services industry after the global financial crisis and moving the balance of power back towards consumers. These new rights will put an end to the irresponsible lending practices that people have been most concerned about, and help cut the cost of borrowing."
The Government's agreement with the card companies will mean the most expensive debt is paid off more quickly, better repayment plans for new customers, a ban on credit limit and rate increases for people at risk of financial difficulty and a right to 60 days to reject interest rate increases. The Government estimates the new rights will save consumers almost £300 million a year and one industry forecast predicts customers will gain around £500m.
Payments will go towards debt with the highest interest rates first, reversing the industry practice that prevented consumers clearing their most expensive debt until after they had paid off debt at lower rates, including 0 per cent balance transfers.
Consumer Minister Kevin Brennan said: "This is a big win for consumers and helps to put them back in the driving seat with their finances. When we asked the public what changes they wanted to see we discovered most people did not know the charges worked this way. They thought it was unfair and confusing, and they naturally wanted to pay off their most expensive debts first.
"This is a fair framework of rights and rules that makes sure easy and convenient lending for the majority doesn't lead to unmanageable debt for the minority who may be in financial difficulty."
Other measures designed to encourage responsible borrowing and lending and help people avoid taking on unmanageable debts include:
The new Consumer Credit Directive regulations and OfT Irresponsible Lending Guidance to be introduced before the summer, requiring lenders to check customers can afford a loan, give clear information on new loans and give a 14-day cooling off period during which new loans can be cancelled. Lenders who fail to comply run the risk of having their licence to lend withdrawn.
All consumers to have access to their credit records online for £2 or free of charge from June 2010, under a new agreement with the three main credit reference agencies secured by the Department for Business, Innovation and Skills. Access will be free for victims of ID fraud and people receiving debt advice.
Stronger protections under the Lending Code agreed between the British Bankers Association and the Ministry of Justice, so that lenders consider reducing or freezing interest and charges, and accepting token payments, from people who suffer a sudden income shock.
For those suffering the most serious financial hardship, proposals by the Department for Work and Pensions to reform the Social Fund, so that it will be more efficient, easier to understand, and families will be given independent money advice to help them manage their debts.
The five new rights for credit card users agreed by the Department for Business, Innovation and Skills with the UK Cards Association and the Finance and Leasing Association (representing store card companies) are:
Right to repay: consumers' repayments will always be put against the highest rate debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus one per cent of the principal to encourage better repayment practice.
Right to control: consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time; and consumers will have better automated payment options. Consumers will be able to do both of these online.
Right to reject: consumers will be given more time to reject increases in their interest rate or their credit limit.
Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little; and all consumers will be given clear information on increases in their interest rate or their credit limit including the right to reject.
Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.
In addition, consumers who are at risk of financial difficulties will be protected through a ban on increases in their credit limit as well as the ban on increases in their interest rate, and card companies will work with debt advice agencies to agree new ways they will provide targeted support to consumers at risk.