UK Government and the “new deal” with credit card companies
By: Carsten Lexa
In 2009 there were about 30 million credit card holders in the UK, holding about 58 million credit cards, down from 66 million credit cards in 2008. Beyond that, total household debt in the UK has reached a level of 1400 billion pounds sterling, of which 55 billion pounds sterling is on credit cards. When loooking at these numbers, one can easily figure out that the credit card business is “big business” in Britain.
And the credit card lenders are making big money. This is partly due to the general interest on the money borrowed to credit card holders and also due to various fees for using the credit cards. But it is also partly due to a lot of practices that are – carefully spoken – very favorable for the credit card companies. One specific industry practice is for example that repayments go towards credit card debt at the lowest interest rate, not towards debt with the highest rate.
The UK Government and several credit card companies and related associations have now announced a “new deal” that will change a lot of the industry practices unfavorable for credit card users. Most of the contents of the “new deal” will come into effect in January 2011. UK Government estimates that the changes based on the “new deal” will save customers about 300 million pounds sterling a year.
Here is what´s new for credit card owners:
1. Under the “right to repayment”, credit card issuers will use customers´ monthly repayments to pay their most expensive debt first. For customers opening new accounts, the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal. Formerly, the minimum repayment often covered only interest and not repayment of the principal.
2. With the “right to control”, consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time. Additionally, if certain consumers are at risk of financial difficulty, credit card companies may be banned from extending the existing credit limit.
3. The “right to reject” will give consumers more time to reject increases in their interest rates or their credit card limit.
4. The customers will receive a “right to information”. This means that customers at risk of financial difficulties will be given guidance on the consequences of paying back too little and that all consumers will be given clear information on increases in interrest rates or credit card limit including the right to reject.
5. Finally, the “right to compare” will provide consumers with an annual statement that allows for easy cost comparison with other providers of credit cards.
These changes should allow credit card users (and store card users, because the changes will also effect these type of cards) to manage their finances and their debt more easily. It will also save them money, because repayments will now go towards debt with the highest interest rate, meaning interest payments will be reduced. However, the changes are only part of an agreement between the UK Government and the credit card industry. They are not elements of new legislation. But the UK Government promised to place the agreement on a statutory footing if credit card companies do not stick to the agreement. Hopefully, this will not be the case.
For inquiries please contact the author: kontakt@kanzlei-lexa.de
