Unfair credit card charges challenged

Tuesday, 27 October 2009 08:57

Unfair credit card practices and charges are being taken on by the government.

The Department for Business Innovation and Skills (BIS) today launched proposals for the banning of hiking interest rates on debts already built up.

The UK has 62.8 million credit cards with 65.9 per cent deemed as being active and having a balance outstanding.

A rise in minimum payments to ensure debts can be paid off within a reasonable period alongside increasing credit limits without the customers consent are also being called on to be banned.

it has been claimed with low minimum payments customers can be left spending decades to clear debts.

Martin Lewis, creator of MoneySavingExpert.com, said: "As payments are a set percentage, when you owe less you pay less; which means people consistently struggle to cover their interest charges.

"On a typical £3,000 high street card at 17.9 per cent, pay just the two per cent minimum repayments and it'd take you a shocking 41 years to repay, at £6,300 in interest."

He added fixing repayments at £60, the first month's minimum payment, would see the debt go in 7 years paying £2,100 in interest.

Which? personal finance campaigner Phil Jones said: "For too long, card companies have been allowed to apply the tricks of their trade to the detriment of millions of consumers.

"We think it's simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible. The sooner these practices are stamped out, the better."

A major issue being taken on is the changing of the priority in which debts are paid off.

Currently more expensive debts - such as cash advances - are paid off last by most credit cards.

Only Saga and Nationwide offer credit cards where the so-called 'payment hierarchy' means the most expensive debts are cleared first.

Nationwide estimates a switch to paying off debts with the highest interest rates could save users £224 a year.

Michelle Slade, spokesperson for Moneyfacts.co.uk, said: "Sadly, consumers are generally unaware that most credit card providers apply their payments to the cheapest debt first.

"There is an interesting contrast between this practice and the usual advice that a consumer would receive from debt agencies, which is to pay off the most expensive debt first. A change to this policy would be a real step forward for consumer fairness in the credit card market."

The change would match moves in the US - where president Barak Obama signed a 'credit card bill of rights' in May.

Chris Rhodes Nationwide product and marketing director, said: "We recognise that an adverse order of payments penalises the most vulnerable customers, who can ill-afford additional interest charges, especially in the current climate.

"It's time that the extra debt burden created by this practice was lifted from UK consumers."

Roger Ramsden, chief executive of Saga Personal Finance, added: "It comes as no surprise to us that people feel cheated and angry by credit card providers who make it more difficult for their customers trying to pay off their credit card debt.

"If credit card providers won't put their own house in order then we urge the government to outlaw this sharp practice."

The UK Cards Association has warned a tightening of rules could led to less choice.

Melanie Johnson, chair of the body, said: "Before we tell government of our concerns that these new proposals could lead to some customers having a lot less choice and to extra costs for many of them, we will be reviewing the evidence and we expect the government to do the same.

"These proposals risk disadvantaging more customers than they protect."

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