Robert Powell takes a look at how the new EU-wide credit card laws will affect you...
Our flexible friends have seemed a tad unfriendly recently.
Despite the Bank of England Base Rate having remained at a paltry 0.5% for the last two years, the average credit card interest rate is currently at a 13 year high of 18.9%!
Credit card companies attempt to justify these ballooning rates by blaming tax rises and increasing unemployment for bringing about a higher risk of customers not repaying their debts. Sounds reasonable on paper, but in practice these risky customers are often those who took out cards in the boom years and are now facing jacked up interest rates on hefty wedges of debt.
If only the card companies hadn’t been so credit-happy all those years back.
New EU laws known as the Consumer Credit Directive aim to bring an end to this profligacy and usher in a culture of ‘responsible lending’ within the credit card sector. But unfortunately one of the side effects of this moral crusade is that more borrowers will be given a higher interest rate than the one they initially applied for.
Well that’s just typical!
Robert Powell hits the streets to bust these credit card myths
In fact, most advertised interest rates are ‘APR typical’. This means that not everyone who holds the card will be charged the same interest rate. If you have a dodgy financial history then the lender may decide to up your interest rate from the typical APR because of the increased risk that you won’t repay your debt.
Previously lenders were required to give their typical rate to two-thirds of successful applicants, but as of February this has fallen to just 51%. This will leave millions of borrowers paying more in interest than they expected when they made their application.
The typical interest rate changes are intended to force borrowers to become more familiar with their credit history and financial situation as those with patchy records will now almost certainly receive higher interest rates.
But it’s not the only rule that’s been introduced as part of the new Consumer Credit Directive. Other new laws include:
Clear information: Lenders will have to provide all the information about interest rates and credit checks before you apply for a card. This must be provided on a standardised, easy to compare form.
Full explanations: Lenders must explain every aspect of the credit product (repayments, fees) to you before an application is made.
Right to withdraw: You will have the right to change your mind for up to 14 days after signing the agreement.
Early repayments: You will be able to clear the full outstanding balance without incurring any early repayment fees.
Section 75 of the Consumer Credit Act can help when your credit card purchases go wrong
Credit checks: Lenders must always check your credit-worthiness before offering or increasing credit.
Selling debt: Lenders must inform you before selling your debt on.
Broker fees: Brokers or credit intermediaries must disclose any fees they stand to earn from you.
All of these proposals are part of an attempt to strengthen the rights of the consumer as well as the obligations of the lender by creating a more transparent relationship between the two parties.
So no more trawling through small print to pick out sneaky catches that will bump up your bills or interrogating call centre staff in a Paxman-esque manner just to find out what they’ve done to your account. Sounds great, right!?
Will it work?
Probably not, but it’s a step in the right direction.
Call me a cynic but it’s my opinion that ‘morally correct’ laws like these really only serve as window dressing for profit hungry multi-national companies. I’d imagine that in the months running up to the introduction of these new laws many a credit company CEO locked a few executives in a room with a vat of coffee and tray of sandwiches and told them not to come out until they’d figured out a way round this new legislation.
The rules on withdrawing from a contract and fee-free repayments obviously improve the rights of the consumer, but these are somewhat trumped by the typical APR changes. Yes, they may be intended to improve consumer understanding of their credit rating but they also give card companies a licence to irresponsibly jack up interest rates in the search for a quick buck.
Rachel Robson explains how negative order of payment works and how to avoid it.
Yet maybe this is a good thing? After all we are still limping away from a recession caused by overzealous lending – perhaps any laws that will discourage people from borrowing when they can’t afford it are a positive and sensible move?
It’s a highly contentious argument and you can have your say in the comment boxes below.
Other new rules
Finally, I want to go over a couple of other new rules that have been wedged into the credit card sector in the last month or two that you really should be aware of.
The first concerns our old friend negative order of payment or more accurately, the end of negative order of payment. Yes, this particularly cunning trick is now illegal, but there are still a few credit card companies that aren’t playing ball – read Credit cards that bend the rules to find out who they are.
The second new rule allows you to fight back against rate jacking. Rate jacking is when a lender ups your interest rate mid-contract forcing you to either switch cards quickly or face spiralling interest rates. You can read about this new legislation by heading to The secret trick you can use against your credit card provider.
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