Credit Performance Nº 14
Card providers resist credit limit ban
The UK credit card industry bowed to government pressure and agreed to help consumers manage their debts but it stopped short of a total ban on unsolicited credit limit increases(...)
Por: Lucy Warwick-Ching | Ft.com
The UK Cards Association, which represents the card industry, outlined its proposals in its response to the Department for Business, Innovation & Skills’ consultation into credit cards, which ended on Tuesday.
The government’s review into card companies’ practices recommends a crackdown on minimum repayments, a change to the allocation of payments and a ban on unsolicited credit limits and repricing practices.
Credit card companies have long been criticised for increasing customers’ credit limits without their knowledge. Last year 8 per cent of the UK’s 30m customers holding 66m cards were given a credit limit increase.
The UK Cards Association, however, claimed that the government’s proposals would limit competition in the industry. Instead it recommended that credit limit increases should only be banned for customers in financial difficulties. All other customers who are offered a credit limit increase will be offered a new 30 day notice period and a simple means of opting out.
Melanie Johnson, chair of the UK Cards Association and a former Labour MP, said the credit card industry was “keen to give consumers as much control of their finances as possible”. But she added that the government’s options would “limit the options on offer by the industry” which has seen a “gentle decline” on borrowing since 2005.
She said: “Our approach will deliver big improvements to customers without smothering competition and choice, which customers value and gain significant benefit from. It will also maintain features which are vital to lenders being able to lend responsibly.”
Instead, she put forward the credit card providers’ own plans, which she said would cost the industry £250m a year.
The UK Cards Association agreed with the government’s plan to introduce modification to payments practices so that all payments above the minimum payment are allocated to the most expensive debt. But it stopped short of rolling this out to people who only make the minimum repayment each month. For these 2m people with 3.1 per cent of the cards used, the lender will decide themselves which debt is paid off first.
Ms Johnson said this was because while some people can only afford to pay the minimum each month, others choose to pay it because they are on a promotional rate and are paying off more expensive debt elsewhere.
But not all card providers are in agreement on this issue. Nationwide Building Society believes that all credit cardholders’ repayments should be allocated to the most expensive debt first.
“Although this is a step in the right direction, it doesn’t go far enough for the consumer,” said Chris Rhodes, Nationwide’s product and marketing director. “It is not fair for providers to penalise those cardholders who are only able to make the minimum payments each month.
“We have always operated an order of payments that works in the customers’ favour by paying off the most expensive debt first, while still offering competitive features such as 0 per cent interest on purchase and balance transfers. There is no reason why our competitors cannot do the same.”
Meanwhile, the association disagreed with government proposals to ban repricing of interest rates on existing debt, saying it should be allowed. It said that in many cases the interest rate was lowered and that the practice allowed card providers to be flexible.
Kevin Brennan, the government’s consumer minister, responded to the proposals. He said: ”Consumers are clearly very concerned about the credit card market and we are determined to put customers back in the driving seat.
”It’s encouraging that the UK Cards Association have acknowledged that there are positive opportunities to reform the current system...The government will be considering all the evidence before we make our final decisions, but we are clear that we want greater transparency for consumers, and a more responsible culture of borrowing and lending.”
Other proposals submitted to the government for review include those from MoneySavingExpert.com, which recommended that any rate changes should only apply to new debts. This would mean that once the cost of debt is fixed it should not vary.
All the responses to the government’s proposals will now be considered by the department for business but with a general election on its way any changes to legislation could take some time to be implemented.
The government’s review into card companies’ practices recommends a crackdown on minimum repayments, a change to the allocation of payments and a ban on unsolicited credit limits and repricing practices.
Credit card companies have long been criticised for increasing customers’ credit limits without their knowledge. Last year 8 per cent of the UK’s 30m customers holding 66m cards were given a credit limit increase.
The UK Cards Association, however, claimed that the government’s proposals would limit competition in the industry. Instead it recommended that credit limit increases should only be banned for customers in financial difficulties. All other customers who are offered a credit limit increase will be offered a new 30 day notice period and a simple means of opting out.
Melanie Johnson, chair of the UK Cards Association and a former Labour MP, said the credit card industry was “keen to give consumers as much control of their finances as possible”. But she added that the government’s options would “limit the options on offer by the industry” which has seen a “gentle decline” on borrowing since 2005.
She said: “Our approach will deliver big improvements to customers without smothering competition and choice, which customers value and gain significant benefit from. It will also maintain features which are vital to lenders being able to lend responsibly.”
Instead, she put forward the credit card providers’ own plans, which she said would cost the industry £250m a year.
The UK Cards Association agreed with the government’s plan to introduce modification to payments practices so that all payments above the minimum payment are allocated to the most expensive debt. But it stopped short of rolling this out to people who only make the minimum repayment each month. For these 2m people with 3.1 per cent of the cards used, the lender will decide themselves which debt is paid off first.
Ms Johnson said this was because while some people can only afford to pay the minimum each month, others choose to pay it because they are on a promotional rate and are paying off more expensive debt elsewhere.
But not all card providers are in agreement on this issue. Nationwide Building Society believes that all credit cardholders’ repayments should be allocated to the most expensive debt first.
“Although this is a step in the right direction, it doesn’t go far enough for the consumer,” said Chris Rhodes, Nationwide’s product and marketing director. “It is not fair for providers to penalise those cardholders who are only able to make the minimum payments each month.
“We have always operated an order of payments that works in the customers’ favour by paying off the most expensive debt first, while still offering competitive features such as 0 per cent interest on purchase and balance transfers. There is no reason why our competitors cannot do the same.”
Meanwhile, the association disagreed with government proposals to ban repricing of interest rates on existing debt, saying it should be allowed. It said that in many cases the interest rate was lowered and that the practice allowed card providers to be flexible.
Kevin Brennan, the government’s consumer minister, responded to the proposals. He said: ”Consumers are clearly very concerned about the credit card market and we are determined to put customers back in the driving seat.
”It’s encouraging that the UK Cards Association have acknowledged that there are positive opportunities to reform the current system...The government will be considering all the evidence before we make our final decisions, but we are clear that we want greater transparency for consumers, and a more responsible culture of borrowing and lending.”
Other proposals submitted to the government for review include those from MoneySavingExpert.com, which recommended that any rate changes should only apply to new debts. This would mean that once the cost of debt is fixed it should not vary.
All the responses to the government’s proposals will now be considered by the department for business but with a general election on its way any changes to legislation could take some time to be implemented.
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