Easy Credit: No problem no longer
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A battle is brewing between the government and the UK credit industry over new plans to regulate the market and curb the excessive practices of some lenders.
Currently, government proposals include stopping credit card firms changing interest rates on existing debts and ensuring the most expensive debts are paid off first.
But now a trade body, the UK Cards Association, has claimed that the changes would push more people into financial difficulty, which is a little difficult to believe.
There are 30 million UK credit card customers holding 66 million cards.
The industry said that 62% of all UK adults had at least one credit card, but borrowing on these cards had been in “gentle decline” since 2005.
Despite greater caution from lenders about who gets a card, the government is keen to outlaw certain practices that it regarded as unfair and has challenged the industry to clean up its act.
It invited responses to proposals, published in October, which included changing the order of priority for credit card repayments, so that the most expensive debts, such as cash advances, are paid off first. The proposals also included increasing the minimum amount that must be paid off each month to accelerate the overall rate of repayment, banning the practice of raising borrowers’ credit limits without their consent and restricting or banning increases in interest rates on debts already incurred.
The plans follow other limits on credit card practices brought in during 2009, aimed at bringing more transparency for customers.
But the latest proposals have brought a strident response from the industry, which claimed in a 230-page report that customers would not benefit from some of the planned changes.
“These options would reduce competition within the industry,” said Melanie Johnson, a former Labour MP who chairs the UK Cards Association.
“They would also have far-reaching consequences for customers and lenders alike and would change the basic ‘deal’ offered by lenders to their customers and lead to increased financial difficulties for many and to more defaults.”
Instead, the association has put forward its own package which it says will protect vulnerable customers and cost the industry £250m a year
It agrees that people paying off their credit cards should see the most expensive debt paid off first.
But this would not apply for the two million or so cards – 3.1% of the total number of cards – where the borrowers only make the minimum repayment each month for a year. Here, the lender will decide which debt is paid off.
Just over half of these people pay the minimum amount because that is all they can afford, according to the association, with others choosing to pay a small amount because they are on a promotional rate and paying off debts elsewhere.
For that reason, the association said that minimum payments should not be increased. Instead, it said lenders should contact borrowers if the minimum payment had been made for more than six months in a row.
But all of this has not been universally accepted, with the Nationwide building society saying that card providers should always allocate payments to the most expensive debts first.
Also, the credit association said that changes to the interest rates of existing debt should still be allowed.
It argued that in 40% of cases, the interest rate was lowered, and the practice allowed card providers to be flexible. It said customers can opt out of any interest rate changes.
Finally, it said that only 8% of customers were offered an unsolicited increase in their credit limit in 2009. The association said that customers had 30 days to turn down such an offer, so the practice should not be banned except for those facing financial difficulties.
The ban on increases should come in for those who have only made minimum repayments for six consecutive months, it said.
Separately, insolvency experts have called for the rules to be tightened up over who can sell store cards – also covered in the government review. Trade body R3 said financially unqualified shop staff should be banned from selling store credit cards.
“It is frankly irresponsible to sell credit over the shop counter as though it is no more important than buying a sandwich,” said R3 President Peter Sargent.
Without proper training, shop assistants are inappropriately qualified to understand the consequences of what they are selling and often commission-driven. While these cards are presented as innocuous, they can lure vulnerable people into debt.
All the responses to the government’s proposals will now be considered by the Department for Business.
However, with a general election looming, any changes that require new legislation could take some time to be implemented and a new government might also come up with different plans.
It is clear to most analysts that the easy availability of credit is a major problem for both the financial and social wellbeing of the country. This problem needs tackling seriously and immediately and with little concern for the profit margins of the companies providing easy credit to vulnerable people.
