Banks warn against credit card crackdown
Credit card companies warned yesterday that special introductory offers would disappear and lower-income applicants would be denied cards if the Government pressed ahead with its planned crackdown on the industry.
The warnings came within hours of the Government announcing proposals to prevent banks and store card companies from exploiting customers through confusing and complex fine print and other questionable practices.
The centrepiece of the reforms is a plan to outlaw a little-understood industry dodge, whereby customer repayments are used to pay off the cheapest category of their debt first, leaving cardholders still paying interest of as much as 30 per cent on more expensive borrowing categories. The so-called “order of repayment” clause is a notorious and widespread snare that typically costs cardholders £224 a year, according to Nationwide Building Society, one of the few lenders that does not use it.
Consumer groups welcomed the plan to ban it. Michelle Slade, of Moneyfacts, the financial information provider, said: “Customers have been paying a heavy price for this. Do most people really understand it? I suspect not.”
The proposal was among measures designed to help borrowers using credit cards and store cards that were outlined yesterday by the Government. Kevin Brennan, the Consumer Minister, said: “Consumers should not feel each month as if they’ve been exploited or disadvantaged.” Gordon Brown earlier accused the banks of “sharp practices” in credit-card lending.
• Other proposed measures include: Raising minimum monthly repayment levels to encourage people to pay off debt more quickly and so incur lower interest charges.
• Banning banks from increasing credit limits without the prior consent of customers.
• Restricting banks from raising interest rates on existing debt.
Bankers privately warned that reforming the order of payments would lead to fewer special introductory deals with teaser rates, such as the offer of lengthy interest-free periods for new recruits transferring balances from other providers and cashback offers on purchases. “It will kill 0 per cent deals dead,” said one high-street banker, who declined to be named.
Introductory deals dominate the market, with lenders offering new customers up to 18 months of interest-free borrowing or 12 months’ interest-free spending.
Some financially savvy borrowers do well playing the system, switching from bank to bank to take advantage of introductory offers. However, the less well-informed, the less nimble and the plain forgetful pay the price. Card companies can offer these sweeteners only because they know that many customers will be caught out by the clause.
One senior credit card executive pointed to the United States, where the supply of credit is already shrinking and its cost rising as a result of similar reforms, which are to come into force in February 2010. He also argued that the proposals could lead to the departure of smaller players, reducing competition in the industry.
The proposal to outlaw the common practice of unilaterally raising credit limits would also have adverse consequences. Banks routinely start new customers, such as students, on very low limits of, say, £500, confident that they will be able to raise those limits in time. Without that freedom, they would be reluctant to offer cards to young, low-income applicants, one banker said.
The restriction preventing lenders retrospectively raising interest rates on borrowings by higher-risk clients could also have adverse results, leading to lower-risk customers having to pay more. “It will make it more expensive for everyone else,” the banker said.
Although 69 per cent of cardholders pay their debt in full each month, a sizeable minority are trapped with debts that they have no realistic hope of ever paying off and incur interest rates of as much as 30 per cent. People in difficulty consulting Consumer Credit Counselling Services had average credit card debts of £15,000. For those with income of less than £10,000 a year, average credit card debt was £8,000 and store card debt was £1,400.
Credit-card borrowing had been falling in recent years, but unexpectedly began to rise during the summer, prompting fears that households and small firms were resorting to cards as a last resort because other forms of credit have dried up. After America, Britain is most attached to credit cards, with 63 million in circulation, slightly more than the population.
John Penrose, the Shadow Consumer Minister, said: “These announcements do not go far enough to address the culture of problem debt and do not seek to change consumer behaviour or encourage more responsible borrowing.
“When we tried to change the law to stop unsolicited increases in fees and interest rates, the Government opposed the measure."
Nessun commento:
Posta un commento