Credit card cheques to be banned

Thursday, 02 July 2009 10:49

Credit card cheques sent unsolicited to customers will be banned, according to new government plans.

The department for Business, Innovation and Skills (BIS) today launched a consumer white paper to take on firms that are leading consumers into debt.

Measures include reforms for credit cards and store cards to stop people running up debts they will have no way of clearing them.

However, widespread bans are not expected as BIS state any measures must be balanced with "the importance of choice and a flexible market with personal responsibility and protection from over-indebtedness".

Besides a ban on credit card cheques, there will also be an Office of Fair Trading investigation in pay day loans and door step lending where interest rates are over 50 per cent.

Courts will receive new powers to ban persistent rogue traders.

Consumer groups have hit out at credit card cheques, which attract a high rate of interest of 26.71 per cent on average.

Interest on these cheques - in fact just loans thrown on the credit card - is incurred from the day the cheque is cashed, as there is no grace period.

Business Secretary Lord Mandelson said: "The government is determined to help consumers during the current economic difficulties. Many family budgets are under unprecedented strain.

"Our aim is to help consumers make better informed borrowing decisions."

A review of credit cards will look at a number of controversial areas of credit cards.

Areas to be targeted besides credit card cheques will be moves to restrict interest rate hikes, and moves to increase monthly minimum repayments.

Last week Barclaycard was criticised for lowering its minimum monthly payment - which while dropping repayments in the short-term will increase the life of debts for borrowers in the long-term if they stick to just paying the minimum.

BIS is also looking at banning increases to credit limits without borrowers consent.

Lenders will also be required to check the borrowers credit-worthiness before they borrow and explain financial products fully.

In 2006, the government launched a study into credit card cheques.

It found then "no hard evidence that consumers are being plunged into debt from using credit card cheques".

But it did call at the time for "clearer, accurate information on interest rates and fees".

Catherine Matthews, partner at licensed insolvency practitioners Tomlinsons, said many of the worst cases of insolvency involved credit cards.

"In part, this is due to the reckless spending of the people involved but the credit card providers and banks are guilty of an even greater profligacy - encouraging these people to spend, spend, spend in the first place through aggressive marketing tactics," she said.

"Today's recommendations, which among other things could lead to a ban on credit card cheques and a review of charges, will hopefully be the first step towards a much more responsible credit climate."

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