Credit card holders given better repayment deal

Government measures force card providers to reduce the costliest part of a debt first, saving card holders millions of pounds in interest payments
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New credit card repayment rules should save card holders millions of pounds
New credit card repayment rules should save card holders millions of pounds. Photograph: Peter Macdiarmid/Getty Images

Credit card firms will be forced to change the way they make customers pay off their debts, in a move that could save 9 million borrowers a typical £225 each a year, the government announced today.

The move is part of a package of measures to tackle indebtedness unveiled this morning by the prime minister, Gordon Brown.

Currently, when cardholders transfer a debt to a card provider at a low or zero rate of interest, and subsequently buy items on the card at a higher rate of interest, often around 20%, most card companies force them to pay off the cheaper debt first when they make repayments.

This makes the costlier debt on the card last longer, thus prolonging the debt and earning the card companies more interest.

Today, the government said it would introduce legislation to stop the practice, known as "adverse order of payments", in a move that will save 9 million of the country's 30 million cardholders around £500m a year, according to one building society.

However, the government decided against setting a minimum monthly repayment for consumers, or capping interest rates on cards.

The package of measures, which have been agreed with the credit card and store card industry, gives consumers five rights:

Right to repay: consumers' repayments will always be put against the highest rate of debt first. For consumers opening new accounts the minimum payment will always cover at least interest, fees and charges, plus 1% of the amount they have borrowed.

Right to control: consumers will have the right to tell their providers never to increase their credit limit, and the right to reduce their limit at any time.

Right to reject: consumers will be given 60 days to switch provider if informed of an increase in their interest rate, and will be able to reject the offer of any increase in their credit limit.

Right to information: consumers at risk of financial difficulties will be given guidance on the consequences of paying back too little; and all consumers will be given clear information on increases in their interest rate or their credit limit including the right to reject.

Right to compare: consumers will have an annual statement that allows for easy cost comparison with other providers.

In addition, the government said it would protect consumers who were at risk of financial difficulties by banning card providers from increasing their credit limit or interest rate, and allow consumers to access their credit records for free or just £2.

Brown said: "Step by step we are reinventing the financial services industry after the global financial crisis and moving the balance of power back towards consumers.


Positive order of payments

The changes follow the Credit and Store Card Review launched by the government last year. It received responses from more than 5,000 members of the public, as well as receiving input from all the country's card issuers and a number of consumer bodies.

A government spokesman said it became clear from the responses that the majority of cardholders were not aware they were being made to pay off their cheaper debts first. When they understood the issue, he said, it was the area in the review they were most keen to see changed.

Nationwide and Saga are the only two card issuers that do not use an adverse order of payments system. Other credit card firms are expected to be given until the end of 2010 to change their system.

Nationwide's product and marketing director, Chris Rhodes, said: "This review is excellent news for the consumer. A positive order of payments would mean that consumers can trust that when they make a payment it will go to paying off their most expensive balance first. That would be good news for anyone who cannot, or chooses not to, pay off their credit card debt in full."

Melanie Johnson, chair of the UK Cards Association, said: "We are pleased that our evidence on unsolicited credit limit increases and the repricing of existing debt has conclusively shown that existing practices do not need to be overhauled.

"We believe that, overall, the outcome of the review is balanced and will give consumers the greater control and convenience that the industry and the government wish to provide."

She added: "Now that we have agreement in place we can focus on the important task of implementing these changes so that customers can benefit."

However, the association said the changes were likely to cost the industry around £533m over the first two years – double the cost of the package of proposals it had put to the government.

This could mean some providers consider introducing annual fees to recoup these losses.

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