Credit card firms to be forced to end rip offs

Ripoffs to end as the Labour Government acts against rogure credit card companies

The Government has announced we will take tough action to end unfair lending terms by credit card companies. Labour’s action will mean:

Banning the practice of increasing credit limits without prior consent

Banning unasked for credit card cheques

Placing restrictions on increasing the interest rate on existing debt

Raising the minimum monthly repayments levels to encourage people to pay off their debt faster

Changing the rules so that the most expensive debt on your credit card is paid off first. (Currently most credit card companies make you pay off the cheapest debt first.)

Consumers using their cards responsibly and making payments on time should not pay the price for excessive risk-taking by financial institutions: Kerry McCarthy

Supporting the move, Kerry McCarthy has called on credit and store card companies to give people a fairer deal and prevent spiralling debts. Kerry said:

“Particularly during this difficult economic time, I want to do what I can to help local people manage their finances and cope with repaying their debts.

“Constituents regularly contact me about banks’ unfair practices and credit rip offs, so it’s clear how important it is to take action with over the top charges in credit card bills, credit repayments or the high cost of credit on things like store cards.

“Consumers using their cards responsibly and making payments on time should not pay the price for excessive risk-taking by financial institutions; it is not acceptable for companies to increase interest rates without proper explanation and I will be pushing for the Government to ban or at least restrict the re-pricing of existing debt.”

Consumer Minister Kevin Brennan said:

“Card companies have to get their act together and do more for consumers.

“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. 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.”

The Labour Government has published a consultation document giving the detail of proposed changes in the law on repayment policies imposed by credit and store card providers. It examines:

Changing the rules that set out the order in which debts built up on a credit card are paid off

Most credit card companies make customers pay the cheapest debt off first. This is a particular problem for consumers who withdraw cash on their card, typically charged at 25 per cent APR or more. They are often the most likely to be vulnerable to financial difficulties. The Government is considering rules that would mean the most expensive debt is paid off first.

Raising the minimum monthly repayments levels to encourage people to pay off their debt faster.

Around one third of people who don’t pay off their credit card bill in full each month make only the minimum repayment. This can mean consumers take decades to pay off the debt. The Government is considering the introduction of a mandatory higher minimum payment each month.

Banning the practice of increasing credit limits without prior consent

It is common practice for credit and store card lenders to increase credit limits without consent. According to recent research by Uswitch, 5.7 million consumers saw their credit limits changed in this way in the last year. The Government is considering banning this practice or requiring consumers to opt-in to credit limit increases.

Placing restrictions on increasing the interest rate on existing debt

Labour is concerned about interest rates being increased without proper explanation. Consumers using their cards responsibly and making payments on time should not pay the price for excessive risk-taking by financial institutions. The Government is considering banning or restricting the re-pricing of existing debt.

The credit and store card consultation runs until January 19 and people can read the proposals and register their views at: www.bis.gov.uk/creditconsultation

The Government said in the Consumer White Paper (published July 2 2009) that it would examine the way credit card repayment policies can lead to people paying more in interest charges than they expect.

The Government is already taking action and is legislating to ban unsolicited credit card cheques in November. Under the Office of Fair Trading’s Guidance on Irresponsible Lending Practices, coming into force in January, lenders should not encourage borrowers to increase existing debt. Lenders failing to follow the OFT’s guidance can be stripped of their credit licences. This could be used to enforce changes to minimum payments and credit limit increases. The Consumer Credit Directive comes into force in June, requiring credit card companies to properly explain their charges.

The consultation builds on the ‘fair principles’ agreed at the Credit Card Summit at the Department for Business in November 2008.

The aim of the move is to provide help for renovating properties to people who are seeking to get on the first step of the property ladder.

This new financial assistance has been introduced to complement an existing range of help available for owner-occupiers needing essential repairs.

The loan term has an optional interest only period for up to two years, which means that the initial cost of the loan is very low, to assist with affordability in the early years, followed by a 13-year capital repayment period.

The cost of the loan will depend on the amount borrowed and the length of the repayment period. The other advantage of the loan compared to commercial loans is that borrowers will always know how much they will have to repay.

Councillor Mark Wright, Cabinet Member for Housing and Service Improvement, said: “The launch of a new low-cost loan is great news for first-time buyers in Bristol who are struggling to buy in the current housing market.

“It’s a fact that the most affordable homes for first-time buyers are also the ones most in need of repair and renovation. This new loan will offer flexible and affordable help in meeting the costs of repair and improvement work.

“It will also help meet our aim of improving private housing conditions and ensuring that all houses meet the Government’s Decent Homes Standard.”

For further information or to make an application for a first-time buyers loan or financial assistance for other essential maintenance and improvement, please contact Bristol City Council’s Neighbourhoods directorate on 0117 353 3871.