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17/03/10

Government introduces five new rights for credit card users

Yesterday was a good day for credit card users. The government introduced five new rights for all consumers who use credit and store cards.

Firstly, the right to repay: Consumers will have the right to pay off their most expensive debts first, saving them money. This is probably the most significant of the new rules. At the moment any repayment you make on a credit card debt pays off the portion of the balance with the lowest interest rate first.

Say you transfer 450 of debt onto a card in order to benefit from a balance transfer rate of 0%, then you use the card to buy 50 worth of petrol. The 50 will then accrue interest at the card's standard rate which could be around 20%. Then when you make a repayment, it goes towards reducing the balance transfer amount, and the 50 remains on your card accruing interest until the other 450 has been paid off. But, under the new rules this will have to be reversed, and repayments will pay off the debt costing the most in interest first.

What is known as the positive payment hierarchy has to be introduced by card companies by January 2011.

In addition, minimum payments are on the rise to encourage people to pay off their credit card more quickly. The minimum payment on new credit card deals will have to cover at least that month's interest, fees, charges and 1% of the amount that has been borrowed.

Secondly, the right to control: Under the right to control, consumers will be able to refuse a raise in their credit limit and reduce their limit whenever they like , either online or through an automated telephone system..
Consumers are now empowered to tell their credit card provider they never want a credit limit increase. Card companies often extended credit limits as they saw it as a great way of getting people to borrow more.

Thirdly, the right to reject: The time period consumers have to reject any interest rate increase has been doubled. , Under the new rules, card users will have 60 days to reject an interest rate rise and be able to close the account, and can pay off any existing debt at the old interest rate.

Fourthly, the right to information: There will be a new responsibility on lenders to develop a system to warn all customers at risk of financial difficulty about the consequences of paying back too little, and all credit and store card holders will be given clear guidance about their rights on interest rate hikes and credit limit increases.

And finally the fifth right, the right to compare: This is a new responsibility on lenders to send consumers a yearly statement detailing how much it cost to use their card in that year, including all interest and charges. This will be available electronically to consumers.

Consumer champion Martin Lewis commented it's a "wonderful day" for credit card users following a new ruling on debt payment. This is the single biggest stealth charge that credit cards levy. What they do you see is they will advertise multiple rates, so they might say you can shift debt to us at 0%, but then you spend on the card and it's at 20%. Then when you make repayments, all of your money is focused towards paying off the cheap debt which leaves the expensive debt trapped. You cannot pay it off and it just keeps accruing interest after interest after interest. What the Government has said now is that they can't do that anymore. All of your repayments need to clear the most expensive debts. That's going to cost the credit card industry 500 million a year and hopefully the cash will come into our pockets.

This happens on every single credit card bar one - all of them use adverse repayment hierarchy. Now sometimes it doesn't have a big impact, but the key is if there are multiple rates charged on a card, even if you haven't got a special promotional rate, it might be 17% for spending, 18% for debt transfers, 25% for cash and they always clear the cheap debt first, locking in the expensive debt costing you more money, charging you more interest. It's been a nightmare, I've been campaigning against it for 10 years. It is a wonderful day to see the end of it."