Credit cards come under Government scrutiny

The Government has announced new proposals to ensure that credit and store card companies give people a fairer deal.

As part of a series of reforms designed to make financial services work for consumers, the government has made a number of proposals to protect credit card users.

One of the key areas of reform is to change the rules that determine the order in which debts built up on a credit card are paid off.  As MoneyHighStreet.com reported yesterday, most credit card companies make customers pay off the cheapest debt first.

This forces customers who use their credit cards to withdraw cash to pay interest at 25% APR or more.  The government intends to ensure that the most expensive debt is paid off first.

The government is also proposing to ban the practice of increasing credit limits without prior consent or will require customers to opt-in to increases in their credit card spending limits.

A key proposal is to raise the minimum monthly repayment levels to encourage people to pay off more of their monthly credit card bills. Around one third of people who don’t pay off their credit card bill in full each month make only the minimum repayment.

This can mean consumers take decades to pay off their credit card debt. Raising the minimum payments should reduce overall borrowing, the government hopes.

These proposals are finding favour with many industry commentators.  For example Which? personal finance campaigner, Phil Jones, says:

“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.”