Credit card customers have been given a boost after new rules to protect them from unfair treatment were launched today (15 March).
The best news among the measures is a change in what banks call the allocation of payments. Previously, many lenders had used customers’ payments to write off the cheapest debts on their credit card first – meaning that more expensive debts were allowed to mount up. However, today’s change will bar this practise, which at present affects around a quarter of all credit card accounts.
Under the new regulations agreed between the credit card industry and government, the minimum monthly amount that credit card customers have to pay back will also increase to cover all interest fees and charges, plus 1 per cent of the principal borrowing. The aim of this is to discourage borrowers from allowing expensive debts to build up.
How this affects you
Here’s the lowdown of the main changes and how you will be impacted:
- You will now always pay off your most expensive debt first. Previously, many lenders had sneakily allowed consumers to pay off cheap debt first, allowing them bigger earning on interest
- New credit card customers will have a minimum payment that will cover at least interest, fees and charges, plus 1 per cent of the principal. This will not be an increase for many customers, who may already have minimum payments above this level, but is aimed at encouraging borrowers to change their repayment behaviour
- If you regularly repay the minimum on your card, you will be reminded that this is the most expensive way of paying off your debt
- You will have a 30-day ‘opt out’ period for any increase in the credit limit on your card.
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Existing debts will have a 60-day notice period before any increase in interest rates occurs.
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A ban on offering unsolicited credit to people in financial difficulties
A baby step forward
The proposals have been greeted with a largely lukewarm response from pressure groups, with Credit Action, a consumer debt charity, describing them as “baby steps in the right direction”.
Chris Tapp, director of the charity, said that “there is much more that could have been done by the government to really, fundamentally, overhaul the way the credit card market works”. He also indicated that greater movement, in particular, could have been made on minimum payment levels.
According to the UK Cards Association, around 3 per cent of credit card customers pay the minimum amount for 12 consecutive months – so today’s measures will go some way to cutting debt levels for credit card customers. However, Tapp suggested that lenders should be forced to take further actions by clearly outlining how much more such action costs customers on each bill.
Will it cost us all more down the line?
While the news has generally been well received by credit card companies, it is likely that the additional cost to the industry will have to be made up somewhere – and that could well mean that consumers end up paying the price further down the line.
Joanne Garcia, head of credit cards at Confused.com, noted: “It’s great to see credit card providers agreeing to treat their customers more fairly and encourage them to be more in control of their finances.
“However, customers may end up paying in the long run as the cost of these changes are likely to see another nail in the 0% balance transfer card coffin.”
