Unfair credit card terms to be outlawed?

There has been a considerable growth in the use of credit cards over the last few decades, with data from the British Bankers' Association showing that not only is it the most popular form of unsecured borrowing in this country but that there are more credit cards than people.

However, the government believes that many people are left confused by the current system for credit cards and that some of their features appear to be stacked heavily against the benefits of the consumer.

There is currently little control that consumers have about how debts will be repaid, over increases to their credit limit or over changes to the interest rates they are charged.

Therefore, an initiative has been proposed with the aim of introducing "important new protections for the consumer".

Consumer minister Kevin Brennan said: "It is not acceptable for card companies to impose complex and confusing terms and conditions that can leave people baffled, or to increase interest rates without proper explanation."

"Consumers should not feel each month as if they have been exploited or disadvantaged," he added.

The proposals will now be studied by the body representing UK card issuers.

What are the new proposals?

Here's what the Department for Business, Innovation and Skills report states: "We want to secure a better deal for consumers, giving them improved control of their credit and store card borrowing, whilst also ensuring that any intervention is proportionate, transparent and targeted."

The latest proposals include changing the order of priority for credit card repayments, so that the most expensive debts, such as cash advances, are paid off first.

It is also outlined that the minimum amount that must be paid off each month should be increased to accelerate the overall rate of repayment and avoid debt being repaid at spiralling costs over potentially decades.

This could mean that card providers are forced to increase the minimum monthly repayment that they demand. The government is considering raising this to at least five per cent of the outstanding balance.

At present minimum monthly payments are typically set at a level covering that month's interest charges, the Guardian reports. So, for example, a cardholder with an outstanding credit card balance of £1,856 with an interest rate of 17.6 per cent would pay £4,620 in total interest charges over 38 years and ten months at a typical minimum repayment of two per cent of the outstanding balance.

But, the newspaper points out, if the minimum payment was increased to five per cent the cardholder would incur £748 in total interest charges over eight years and ten months.

Raising borrowers' credit limits without their consent will be banned, consumers will first have to be consulted about the changes and it also proposes that increasing interest rates on debts already incurred should also be outlawed.

Risk of being disadvantaged?

There is a suggestion that the new proposals may not be of benefit to cardholders, despite their intentions.

Melanie Johnson, chair of the UK Cards Association, said: "We need to be able to demonstrate what impact these would have on consumer choice and the costs to customers of using credit cards."

"We will be reviewing the evidence and we expect the government to do the same. These proposals risk disadvantaging more customers than they protect," she added.

However, some consumer groups have supported the moves by the government to put consumers "back in the driving seat".

Phil Jones of Which?, said: "For too long, card companies have been allowed to apply the tricks of their trade to the detriment of millions of consumers.

"We think it's simply wrong to entice people into spending more than they can afford and then to squeeze as much money out of them as possible."

Teresa Perchard of Citizens Advice said new enquiries about credit, store and charge card debts was the biggest group of problems that people brought to CAB offices last year.

She said: "In particular we see far too many people on low incomes who have drifted into very high levels of borrowing as a result of unsolicited increased access to credit. A lot has been said about responsible lending and borrowing over the last few years, but it has yet to be achieved."

Ms Perchard stated that 300,000 people already in debt were responsible for new enquiries about credit and store cards last year.

Consumers are invited to give their thoughts on the proposals at the Department for Innovation, Business and Skills website.