Go for the credit card clampdown Gordon!

by Ed Bowsher on 06 April 2010  |  3 comments
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I've seen speculation that Labour will announce a cap on credit card interest rates in its manifesto. Good idea!

I was pleased to read this on The Guardian website:

"Cabinet-level discussions are also under way on a range of proposals including a cap on interest charged by credit card companies."

This is good news. I hope the rumours are true and Labour does stick a proposal along these lines in its manifesto. Hopefully the other parties will have the same idea too. In fact, we called for just such a cap in our credit card charter last summer. We said:

"The interest rates charged on many credit cards are way too high. Credit card APRs should be capped at Base Rate plus 10%."

Over the last year, the credit card companies have said they will make many of the other changes that we suggested last year in our charter. A cap on rates is the big one that the card companies have ignored. So I'm delighted that we may see change in this area.

Downsides

I accept there are some downsides to a cap on interest rates. Lower rates will reduce credit card profits and could lead to a widespread introduction of annual fees for card users. A rate cap might also mean less attractive deals for balance transfers and cashback. Maybe 0% balance transfer cards would completely die out.

It's also possible that the credit card companies would only want to issue cards to people with top quality credit ratings.

Given these downsides, I'd like to modify last year's proposal a little. I wouldn't impose an interest rate cap on all credit card borrowing. So some people with less than sparkling credit ratings could be charged a higher rate on their debt. But they would also have a very low credit limit.

That would mean the banks would get some compensation for giving cards to riskier customers. But those customers wouldn't get sucked into paying big interest bills because their credit limits would be low. Yes, they might be paying a high interest rate of 17%, but the interest would be charged on a small debt, so the total interest bill would be low.  

However, on the fees issue, I don't want to change anything. I accept that some cards might introduce annual fees if there was a rate limit, but this is a competitive market and I suspect fee-free cards wouldn't die out completely. And, anyway, cards charging 20% APR on £5000 debts create real human misery and I think it's time they largely disappeared.

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