Credit cards agree to hold back chasing debts

Friday, 12 December 2008 11:02

Credit card firms have reached an agreement with the government over how they chase people falling behind on their debts.

Under the agreement, customers in trouble with their credit cards will be given a minimum 30-day breathing space to draw up a debt repayment plan.

During this time credit card firms will suspend collection activity.

Credit card firms have also pledged to be clearer over the interest rates they charge and how they are calculated - taking into account the risk profile of customers.

The move comes as consumers are complaining about interest rates on credit cards increasing - even for those who have maintained a clean repayment record.

Joanna Elson, chief executive of the Money Advice Trust, welcomed the new 'breathing space' so people can gain free independent debt advice.

"The current economic climate means that more people than ever before will be needing help and support, and this appears to be a useful step forward," she said.

Under the changes, customers will be notified when their interest rate is being changed as a result of risk-based repricing, and if their interest rate goes up they will be given sufficient time to close their account or be offered an alternative product.

Firms will also not increase interest rates within the first twelve months of a customer having a credit or store card.

Sandra Quinn, at the payments association APACS, said: "Credit cards offer great flexibility for borrowing in the short-term but can be expensive if you borrow over a longer period.

"These changes do not mean that your APR will always remain the same, which is why it is important to check that you have the right card for you.

"Your APR is always a good place to start but interestingly only 25 per cent of credit card holders say that they know the APR, and therefore what they are being charged to borrow on their credit card."

Alan Tomlinson, partner at insolvency practitioner Tomlinsons, said the new principles would be a "lifeline to many people who are struggling".

"For a lot of the people we see with serious debt problems, credit cards and their high interest rates are often the straw that breaks the camel's back," he said.

"Overstretched borrowers need more leniency to get their finances back into shape and this is a step in the right direction. But remember that there's a big difference between principles and practice.

"It will be interesting to see whether credit card companies really do play fair in the months ahead or just pay lip service to the new principles," he concluded.

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