Credit card shake-up doesn't go far enough

by Ed Bowsher on 27 October 2009  |  8 comments
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The government is slowly making progress on clamping down on some credit card rip-offs. But ministers should be moving more quickly, and their proposals don't go far enough.

The government is slowly making progress on clamping down on some of the worst credit card rip-offs. Progress is welcome, but ministers should be moving more quickly, and their proposals don't go far enough. 

The good news 

Here are today's proposals: 

• A ban on negative payment hierarchy. In other words, all credit card repayments would have to go towards the most expensive debt first. Negative payment hierarchy has always been a monstrous rip-off. Let's crack on with ending this as soon as possible. 
   
• Credit limits could no longer be increased without the prior consent of the customer.
   
• Restrictions on the repricing of existing debt. As the government says: 'consumers using their cards responsibly and making payments on time should not pay the price for excessive risk-taking by financial institutions.' Spot on.
   
• Minimum monthly repayments should be increased so that people are encouraged to pay off their debt faster.

What's missing 

The above measures are welcome, but more could be done. Here are some other areas that the government should be focusing on: 

• Whilst the base rate has dropped over the last year, credit card APRs have stayed stubbornly high. Some form of cap on rates is required.
   
• Penalty charges for late payment of a credit card bill should be no more than £5. When card providers charge high penalty fees, people with poor money management skills get pushed further into the debt mire. There's no need to charge £12 for sending a reminder letter. 
   
• Special promotional deals - such as a 0% balance transfer - shouldn't be withdrawn after one late payment. Card providers are desperately looking for excuses to start charging rip-off rates from consumers. It's harsh that one small mistake can end up costing a customer as much as £1000. Promotional deals should only be withdrawn when the user breaks the rules a second time. 

Example:  A user moves a £6000 debt to a balance transfer card with a 14-month 0% period. After 2 months, the user forgets to pay his bill on time. Interest is then charged at 17% for the next year, costing the user £1020. That's a harsh punishment for missing a payment deadline by one day. 

• Credit card companies should have to give three months' notice before they can reduce your card's credit limit. We've heard of people with large debts on their cards who suddenly find that their credit limit has been reduced to dramatically below their outstanding debt. They then have to repay a significant chunk of debt very quickly and that can be a very tall order. 

Have your say 

The government is actively encouraging people to express their view on these plans. Go to www.bis.gov.uk/creditconsultation and have your say. 

Above all else, tell ministers to get on with it! An election looms. If legislation isn't passed before the election, we'll have to wait a while until the Tories have got found their way round ministerial offices. I fear that we then wouldn't see any change until 2011 at the earliest. 

• Find out what people on the streets of London think about the cost of credit card debt 
• Compare credit cards with lovemoney.com