Government gets tough on credit cards

GOVERNMENT plans designed to help consumers pay off debt faster met a mixed reaction yesterday.<br /><br />Revealing the government&rsquo;s intention to reduce the amount of overall interest paid, consumer minister Kevin Brennan said it is time credit and store card firms &ldquo;get their act together&rdquo;.<br /><br />He added: &ldquo;My opinion is clear, the current relationship between card companies and consumers cannot go unchallenged.&nbsp; We need to put the customer back in the driving seat.&rdquo;<br /><br />The Department for Business, Innovation and Skills (BIS) proposes that the tougher new rules target four key areas affecting consumers with credit cards and store cards.<br /><br />BIS proposes raising the minimum monthly payment amount &ndash; typically two per cent &ndash; to five per cent, to accelerate the rate at which debts are paid off. <br /><br />It suggests forcing credit card companies to change the order in which different types of debt are repaid, to allow consumers to repay higher-interest transactions first. <br /><br />It also wants to stop lenders increasing consumers&rsquo; credit limits without their consent and to restrict rate increases on debts already incurred.<br /><br />Consumer watchdog Which? welcomed the proposals, which it said could prevent card companies from enticing people into spending more money than they can afford.<br /><br />But Melanie Johnson, chair of the UK Cards Association warned the changes could lead to higher costs and limited choice for consumers, running the risk of &ldquo;disadvantaging more customers than they protect&rdquo;.<br /><br />Meanwhile, Michelle Slade of financial website warned that increasing the minimum monthly payments could &ldquo;tip customers already struggling to meet repayments over the edge&rdquo;, and that more measures would need to be put in place to protect them.<br /><br /><strong>AT A GLANCE </strong>BIS PROPOSALS<br /><br />The Department for Business, Innovation and Skills is running a consultation on new rules governing credit card lending, which will close on 19 January.<br /><br /><strong>THE PROPOSALS TARGET FOUR KEY AREAS:</strong><br /><br /><strong>Changing the rules that set out the order in which debts on a credit card are built up. </strong><br />Most credit card companies make customers pay off the cheapest debt first, leaving the higher-interest cash withdrawals on their accounts for longer. The government is considering introducing rules that will mean the most expensive debts are paid off first.<br /><br /><strong>Raising the monthly repayment levels to encourage people to pay off their debt faster. </strong><br />A large number of people repay the minimum monthly amount on their credit cards, potentially extending the time it takes to pay off the total amount by decades. The government proposes to increase the amount to reduce this time, and therefore the amount paid overall.<br /><br /><strong>Banning the practice of increasing credit limits with prior consent. </strong><br />According to research by consumer website uSwitch, 5.7m consumers saw thier credit limits changed in this way last year. This practice has been blamed for encouraging consumers to get deeper into debt that they may not be able to afford.<br /><br /><strong>Placing restrictions on increasing the interest rate on existing debt. </strong><br />The government has expressed concern about interest rates being increased without proper explanation. It believes that consumers using their cards responsibly and making payments on time &ldquo;should not pay the price for excessive risk taking&rdquo; by lenders.