Know your new rights in the great credit card clampdown

Thousands of people whose credit card rates are increased suddenly were promised new rights last week, though critics said it would do little to stop the practice.

The government announced plans to clamp down on the industry to make it fairer and more transparent. The proposals, announced by the Department for Business, Innovation and Skills (BIS), outlined five rights that, it claims, could save consumers £300m a year.

They include the right to pay off the most expensive debt first when there has been a balance transfer, more time to reject increased rates, and better access to information.

Sunday Times readers have complained that their credit card rates have risen recently — in some cases by as much as seven percentage points.

Egg, part of Citibank, Halifax, Capital One and Virgin Money have all increased rates for some customers this month.

James Taylor, 54, who runs an advertising agency in Reading, received a letter from Capital One saying he would have to accept a seven percentage point increase in his purchase rate to 27.9% or stop making new purchases on the card.

He said: “It’s like being in a restaurant and finding out that the meal that would have cost you £10 will now cost £20. I felt I was being held hostage.”

He has declined Capital One’s higher rate and switched to another provider.

Capital One said: “We must adjust rates to account appropriately for the increased risk of lending to consumers in an economic downturn.”

The government’s new rules will not ban the practice but will increase the amount of notice card firms must give from 30 to 60 days.

David Black of Defaqto, the data firm, said: “The new rules will offer a comfort blanket to consumers but if you have already had your rates increased, these measures will offer little protection. The best you can do is to switch to another card with a 0% introductory rate on balance transfers.”

However, Virgin Money last week cut its 0% offer from 16 months to 14 months, leaving the Barclaycard Platinum at the top of the best-buy tables with 15 months interest free.

It is hoped the new credit card rules will be in place by the end of the year. However, two providers have indicated they will not be able to introduce higher minimum repayments this year because of “technical difficulties”, BIS said.

Here we assess the new rights:

1 RIGHT TO REPAY QUICKER

One of the main benefits for consumers is the drive towards a “positive order of repayments”, where the most expensive debt is paid off first. Today, almost 80% of cards pay off the cheapest debt first, said Defaqto.

Say you transferred £2,000 to a card offering 0% on balance transfers for 12 months but charged 18.9% on purchases from day one. Say you also made £2,000 of purchases and paid back £190 a month.

With a negative order of repayments (where the cheapest debt is paid off first), you would pay a total of £410 in interest in the first year and still be left with a balance of £2,130 to repay, said Moneynet, the comparison site.

If the payments were going to the most expensive debt first, you would pay £187 in interest. The £2,000 on purchases would have been repaid, assuming you made no other purchase during the year and you would be left with the £2,000 on the balance transfer to pay off.

There are only two providers that now offer a positive order of repayments — Nationwide and Saga — the latter provides services only to the over-fifties.

Black suggests having two cards if you want to take advantage of balance transfer introductory offers and 0% on purchases. For balance transfers he suggests the Barclaycard Platinum, which offers 15 months at 0%. There is a 2.9% fee and its free purchase period lasts only three months. For purchases, you would be better off with a Tesco Clubcard, which has 12 months interest-free on purchases.

If you would rather have one card, consider the AA credit card, which offers 0% on balance transfers and purchases until November 2010.

Another measure is to force customers to pay off at least 1% of the debt on top of interest and other charges, to ensure they pay off the balance faster.

2 RIGHT TO REJECT RATE RISES

Customers will also be given 60 days’ notice that their interest rates will increase rather than the 30 days that providers offer today. However, they will still have to stop using the card if the new rate is rejected but can pay off the debt at the old rate.

Customers can also reject automatic credit limit increases and providers will be banned from increasing limits for those at risk of falling into financial trouble. And customers will be able to ask for a reduction in credit limits online rather than through customer services.

3 RIGHT TO CHECK YOUR CREDIT FILE ONLINE

Consumers will have better access to the credit files used by providers to determine how risky a customer is. You can already access your file for £2 from Call Credit, Equifax and Experian, but these are sent by post. BIS wants reports available online. Equifax already offers this service, while the other two have until June to comply.

Consumers will also be given more information about the way they use their cards. A minimum payments warning will be sent, for example, highlighting the overall cost of paying only the minimum each month. An annual credit card statement will also be issued allowing you to compare your spending and interest charges from one year to the next.