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Personal Finance: Credit cards set for a major overhaul

Richard Catlin
26 January 2010

The UK Cards Association (UKCA), which represents the credit card industry, responded on 19 January to the Government's review into credit card practices and the way that consumers are treated by lenders.

The Government consultation, carried out by the Department for Business, Innovation & Skills, ended on the same date that the UKCA response was dated, and set out a number of proposals including minimum payments, the way repayments are allocated, unsolicited credit limit increases and changes to interest rates on existing balances.

The UKCA proposals seek a compromise between what happens now, and what the Government is seeking.

Aimed at helping consumers to manage their debts and reduce the number of card holders getting into financial difficulty, the Government department sought:

A ban on unsolicited credit limit increases;

Interest rates on existing balances to be unaffected by any increase to the standard APR;

A reallocation of how repayments are applied to existing balances, so that more expensive debt, such as cash withdrawals, is paid off before any introductory rate borrowing;

An increase to the minimum payment level, in an effort to help consumers to clear debts faster.

UKCA supports the proposed change in payment allocation, and for consumers, this represents great news. As things stand, the practice of 'negative hierarchy' means that any repayments only go towards the most expensive part of a balance once everything else has been cleared. All the while, interest on that balance is likely to be stacking up. Sadly, the new payment allocation structure will not apply to cardholders who make only the minimum payment each month.

UKCA also supports a ban on unsolicited credit limit increases, but argues that this should only apply to consumers showing signs of financial difficulty, rather than a blanket ban on all customers. Any customers who receive a limit increase should be able to easily opt out in a 'cooling off' period.

It didn't support the Government's proposals on every level. It argues that credit card companies should be able to vary the interest (up and down) on existing debts, in accordance with risk. It says "Re-pricing of existing debt - the industry will produce a consumer leaflet to explain the rationale behind the practice known as 'risk-based re-pricing', building on work which saw a set of industry principles implemented on 1 January 2009. Between January and October 2009, 10.6 million accounts were re-priced, with around 40% being re-priced downwards."

Regardless of which proposals are eventually put into practice, the changes should be a boost for most consumers. With a general election scheduled for the Summer, we may have to rely on individual credit card issuers introducing them ahead of an amendment to the Consumer Credit Act.

In the meantime, if you're looking to get a new card or switch a balance, you can find out which lenders are matched to your credit rating for free on checkmyfile. Using your credit rating to your advantage will improve your chances of being accepted first time around considerably, and save you time and money.

See your matched lenders.