Changes to the way credit cards work could help cut your interest bills – but not all the new rules are for the better.
The way that credit cards are sold and run by banks is changing dramatically in 2011: many of the changes are for the better, and will help borrowers avoid being ripped off or overcharged.
But it’s not all good news. Some rules mean that fewer of us could end up being accepted for the best deals, as we explain below.
More borrowers to miss out on great rates
At the start of February, a piece of European legislation called the Consumer Credit Directive comes into force in the UK.
This involves a number of changes to the way credit cards and personal loans are operated. But there could be one big drawback for borrowers.
Until now, when a credit-card provider advertises an APR (annual percentage rate), the law has stated that this rate must be available to at least two-thirds of applicants – the remaining third can either be rejected, or offered a higher rate.
But the directive changes this so that banks only have to offer the advertised APR to a minimum of 51 per cent of applicants.
So your chances of being accepted for a card at the rate it’s being advertised are likely to be lower under these new guidelines.
Remember that Confused.com’s Card Matcher service can help you find out which cards are likely to accept you before you apply and when you’ve found one suitable for you, you can also do a credit card comparison.
Interest changes that cost you nothing
Also as part of the European rules, the way that credit card APRs are calculated is being altered. This could result in your card’s APR appearing to rise, without your fees or interest rate actually changing.
The APR is supposed to reflect the overall cost of borrowing on the card over the course of a year. (APRs have to be calculated in a uniform way across the industry so that consumers can compare different cards easily.)
The APR cost includes both the interest charged and any monthly fees that some providers impose, and is based on a “typical” borrower who owes a “typical” amount on their card.
The European rules will change what this typical amount is, so the resulting APRs could be slightly different.
Really, though, this is just a technical change and it does not mean that you will be any worse off.
End of a costly trick
One piece of sharp practice by lenders was outlawed at the start of the year. This related to how interest is charged when borrowers have a 0 per cent balance transfer card but still use the card for everyday spending that is charged at the normal interest rate – usually somewhere between 15 and 20 per cent.
Until 2011, what tended to happen was that providers used their customers’ repayments to clear the cheapest debt first. So the transferred balance – which wasn’t accruing any interest – was paid down, but the new spending – which was attracting a lot of interest – was not reduced at all.
The upshot was that borrowers ended up paying much more interest in the long-run.
This year’s rules, however, mean that lenders have to use their customers’ repayments to clear the most expensive debt first – which is great news for borrowers.
More information about rate hikes
Lenders must now give cardholders 60 days’ notice in writing of any increase in their cost of borrowing. If you’re not happy with the increase, you can reject it and continue paying off your debt at the current rate – but you won’t be able to spend on the card any more.
New rules to help you clear debts faster
And from the end of March 2011, banks must ensure that the minimum repayment level they set goes as least some way towards reducing the amount the borrower owes.
At the moment, in some cases minimum repayments only cover fees or interest charges, leaving the debt to mount up.
In future, borrowers will have to pay at least enough to cover fees, charges, and 1 per cent of the outstanding debt.
This may cost you slightly more every month, but it will cut long-term interest costs.
If you’re only managing to make the minimum repayment every month, it could be a sign that you need to seek help with your debts.
