Credit card firms make repayments cheaper

The government announced new rules for credit card issuers on Monday which it claims could save customers hundreds of millions of pounds a year.

The joint commitment, with the UK Cards Association which represents the credit card industry, included measures such as card companies having to change how customers’ repayments are allocated, to pay off more expensive debt first. Currently, repayments are generally applied to the cheapest debt first - adding substantially to customers’ interest costs.

“I’m delighted that the biggest credit card rip-off is coming to an end,” said Ed Bowsher, head of consumer finance at lovemoney.com. “Negative payment hierarchy has been a massive money-maker for the credit card industry. In fact, I’ve been told by industry insiders that this rip-off has been the biggest single contributor to credit card profits in recent years.”

Melanie Johnson, chair of the UK Cards Association, said these key changes will be in place by the end of this year and will become part of the Lending Code.

Other changes include card companies having to contact any customer who repeatedly only makes the minimum repayment to make clear that this is the most expensive way of paying off a debt. Currently, an estimated 3 per cent of customers pay the minimum for 12 consecutive months.

Measures will also be introduced to prevent any customer who is facing financial difficulty from being offered an unsolicited credit limit increase. Anyone offered a credit limit increase will also be offered a 30-day notice period and a simple means of “opting-out”. Around 8 per cent of the 58m credit card accounts in UK had a credit limit increase in 2009.

These new rules will involve a variety of system changes across the UK’s credit card companies, which are estimated to cost the industry about £533m over the next two years.

”Combined, this series of small steps slices credit card stealth charges in half. While I wish it’d been introduced twenty years ago, it’d be churlish not to recognise this one swoop incorporates many of the changes those of us who’ve been campaigning on these issues have been asking for an age,” said Martin Lewis, creator of MoneySavingExpert.com, a consumer website.

However, some experts believe more changes could be made. For example, penalty charges for late payments are typically £12, which is much higher than the cost for the credit card companies. Charges for cash withdrawals at ATMs using a credit card are also too high, said Mr. Bowsher from lovemoney.com.


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