The government has announced a new set of guidelines to tackle some of the sneaky tactics
credit-card companies use to part us from our money. That’s good news, particularly as these are guidelines with teeth: the Financial Ombudsman can force credit-card companies if they don’t follow them to the letter.
So what are the planned changes? The most important is the end of negative payment hierarchies. Up until now nearly all credit-card companies have allocated repayments to the cheapest debt first.
Say you transfer £200 in debt on to a new card at 0%. Then you buy a new coat for £100 using the same card that accrues interest at the credit card company’s standard rate. Until now, any repayments you made would have gone towards paying off the £200 while the £100 continue to accrue high-rate interest. But now this will be reversed so repayments pay off the most expensive debt first.
You will also have longer to reject interest-rate rises. If your credit-card company contacts you to say they are increasing your interest rate you will have 60 days to reject the rate. If you do reject the new interest rate, your card will then be cancelled and you and you can pay off any balance at your original interest rate. You can also tell your credit-card firm that you don’t want them to increase your credit limit.
Finally, minimum payments will rise. New credit-card deals will now have to include a
minimum payment that covers at least that month’s interest, fees, charges and 1% of the
capital amount that has been borrowed. The downside to all these changes is that they
will put a major dent in credit-card company revenue. And the industry will need to recoup
that money elsewhere. So expect to see some of the best 0% deals disappear in coming months and eventually to find yourself paying annual fees to have a card.
Tan Tran is Managing Director of Fontis Capital Ltd., a specialist
property finance consultancy and an owner of several other
businesses including Red-to-Black.co.uk Debt Management.
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