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The government is taking the fight to credit card companies with new proposals to overhaul the way that lenders charge interest on plastic.

A new white paper produced by secretary of state for business, innovation and skills Peter Mandelson has set out proposals to offer "real help" for consumers struggling to pay off debt owed on credit cards and call lenders to account for failing to help their customers get back in the black.

Presented as part of Gordon Brown's Building Britain's Future agenda, the new paper contains some radical proposals to help consumers clear debts more quickly, with a proposed overhaul of the way interest is paid off attracting a lot of attention and potentially paving the way for a fairer deal for consumers.

Getting rid of the worst debt first

If the new laws are passed, credit card providers will be forced to put their customers' repayments towards paying off their highest interest debts first, as opposed to using it to pay off the cheapest debt, while higher interest debt continues to mount.

Responding to this new flagship proposal, Consumer Focus said that it was vital that the government acts to make things easier for Brits struggling to keep up with debt payments during this period of acute economic difficulty.

Meanwhile, the group also offered its support for proposals to clamp down on high-cost credit providers, such as payday loan and doorstop lending companies.

It said the new plans will be particularly welcomed by vulnerable consumers "who have been paying over the odds for credit for years" because of their reliance on these high-cost providers.

"Consumer Focus also welcomes the commitment to review protection for consumers who have paid for goods and services, but not received them because the company has gone bust. The recent rise in corporate insolvencies makes action urgent, with nearly two million UK consumers affected at a value of over £57 million," the group added.

Meanwhile, Eric Leender, retail director of the British Bankers' Association, urged anyone who is experiencing debt difficulty to contact their bank as quickly as possible, as members of the organisation are already working hard with and consumer advice charities to ensure that customers are treated sympathetically and fairly.

It also welcomed the introduction of the new Consumer Advocate role. The white paper introduced this new position to provide education on a wide range of money matters, while also acting as a powerful voice for consumers who have been left in the lurch by companies that have acted unlawfully or unscrupulously.

"They will have the authority to take collective action and get compensation for consumers where business breaks the law, and to tackle unfair consumer credit agreements," said Consumer Focus, which will be running the new service if the law is passed.

A scheme not without its critics

Although consumer groups have broadly welcomed the proposals set out in the white paper, there have been concerns raised that the law could end up hurting struggling consumers.

Notable among the chorus of those cautious about the recommendations was the Confederation of British Industry (CBI), which warned that reputable lenders may be discouraged from offering new credit to borrowers if the laws are introduced in circumstances where it is deemed to be too risky.

"For example, measures to stop reputable lenders being able to change interest rates to reflect customers' changing credit ratings could see some people being denied lending. This could come at a difficult time for them, or force them to turn to unregulated lenders," warned John Cridland, CBI deputy director-general.

He went on to state that unless the proposals contained within the white paper are given careful consideration, they could end up hurting the very people they were designed to protect.

Meanwhile, Geraldine Kilkelly, a spokesperson for the Finance & Leasing Association, warned that the new laws could end up reducing the size of the credit card and personal loan market even further, leaving many people with poor credit histories short on support at a time when they need it most.

A panel of politicians is set to discuss the proposals laid out in the white paper during a three-month consultation, after which time it will be put to a vote in parliament.

In the meantime, consumers who are experiencing debt difficulty may wish to get in contact with the Consumer Credit Counselling Service, which can advise on options available under current laws and regulations.

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