The new coalition Government is set on appointing a regulator to determine the “excessive” interest rates threshold for credit cards. This move is expected to lead to credit card products charging more than 25% being barred, potentially wiping out a handful cards from the market - cards that mostly service consumers with unfavourable credit ratings.
However, the document outlining the key policy areas for the new Government did not tackle other consumer credit vehicles, such as door step lending or pay-day loans, credit products that can see consumers charged as much as 2,000% annual percentage rate for short-term loans.
Financial experts have warned that while the Government’s move is a step in the right direction, it does not do enough to the addresses the wider problem of high debt charges that prevail in consumer credit markets.
Despite the Bank of England slashing interest rates to a historic low of 0.5 per cent, charges and interests in the consumer credit space have generally crept up over the last two years. According to the Bank, on average, credit card APR has increased from 15.26 per cent to 16.53 per cent over this two year period.
In 2007, at a time when the average store card APR was around 28%, the Competition Commission ruled that the store card rates were “excessive”. Providers that charge more than 25% are required to point out that cheaper credit may be available elsewhere via their monthly statements.
The Government is expected to take up the Competition Commission’s 25% benchmark for “excessive” credit card APR.
Industry watchdogs also applauded the Government’s promise to revisit the controversial issue of “unfair” bank charges, with consumers being hit by charges of as much as £39 every time their overdraft limit is breached.
The Government’s policy document stated that stronger consumer protection regulations will be put in place, including measures to end unfair bank and financial transaction charges.
However, the document provides little comfort for the millions who have been hit by excessive bank charges in the last few years. Although Nick Clegg had said he wanted current account providers to return unfair fees already levied before the election - despite banks winning the historic test case last year- the document remains quiet on the subject.
Ann Robinson, director of consumer policy at uSwitch.com, said that the government’s stance on the issue is heartening news for consumers in these tough times. The Government’s demand for greater transparency with credit cards, store cards and energy bills is finally giving consumers the level playing field that was so desperately needed.
The credit card industry has professed somewhat of surprise over the move. According to a spokesman for the UK Cards Association, the DTI, having looked at a cap back in 2004, decided against it. The industry would need to go through the fine prints of the policy document, and communicate with the government to understand what they exactly mean.
Compare Credit Cards and find the perfect credit card deal online with Compare Best Deals