Credit card rates and limits should not rise unchecked, says Government

27 October 2009 / by Rachael Stiles

The Government has today announced proposals to make the credit card market fairer for consumers, such as placing limits on interest rate increases and an opt-in feature on raising credit limits.

The changes to the credit and store card industry, laid out by the Department for Business, Innovation and Skills, are intended to ensure that providers give customers a fairer deal, as part of the Government’s plans for making financial services work better for the consumer.

Consumer Minister Kevin Brennan said: “Card companies have to get their act together and do more for consumers. The Government is putting forward new measures today which we believe will give consumers a better deal. I want to hear from the most important people, the customers, about their experiences and to get their views on our proposals. The current relationship between card companies and consumers cannot go unchallenged. We need to put the customer back in the driving seat.”

One of the things the Government would like to see improved is the ‘payment hierarchy’ on credit cards, which usually sees consumers having to pay off the cheapest debts first, such as balance transfers, while most expensive debts, such as cash withdrawals, accrue higher interest.

The Government is considering rules which would force credit card companies to clear the most expensive debts first.

Raising the monthly minimum repayment would encourage customers to repay their credit card debt faster, the Government argues. Small minimum payments can mean it takes decades for customers to clear the debt, while it continues to accrue interest. To remedy this, the Government is considering the introduction of a minimum mandatory payment.

To counteract the practice of credit card companies increasing credit limits without consent, they might, under the new rules, be obliged to see that only customers who opt-in are given credit limit increases.

Lastly, the Government would like to see restrictions, or even a ban, placed on interest rates being increased on existing debts, which it says is punishing consumers who use their cards responsibly for the “excessive risk-taking” of financial institutions.

“It is not acceptable for card companies to impose complex and confusing terms and conditions that can leave people baffled, or to increase interest rates without a proper explanation,” Mr Brennan continued. “Consumers have a real responsibility to manage their finances properly, but they also have a right to clear information to enable them to do that. Consumers should not feel each month as if they’ve been exploited or disadvantaged.”

Commenting on the proposals, Andrew Hagger of Moneynet.co.uk agreed that it is “high time we saw an overhaul of the way credit cards are designed, marketed and used in the UK.”

But, he added, it’s also down to consumers to educate themselves about how credit cards work and to understand the implications of the payment hierarchy, low minimum repayment levels, and higher credit limits.

“It’s largely down to the providers but it’s a two way problem and consumers need re-educating too,” he said.

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