Credit card companies face government restrictions

By Reno Charlton Staff Writer 5 May 2009

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GOVERNMENT plans further restrictions on credit card lending in a bid to promote responsible lending and avoid consumer debt.

Credit card debt levels in the UK have long since been identified as a serious problem, and in the current financial climate the government has decided that this is something to be tackled as quickly as possible.

In a bid to try and stop people from being tempted into further credit card debt, the government plans to bring in a variety of measures to help decrease credit card debt levels by placing increased restrictions on how credit card providers are allowed to operate.

Unrequested credit limits

According to a recent report, one of the measures the government wants to put in place is to stop credit card companies from increasing credit limits unless the cardholder has specifically requested an increase.

More often than not, credit card companies will review and increase credit limits on a periodic basis and then advise cardholders of any changes.

This allows easy access for cardholders to spend the additional credit, where otherwise they may not have even asked for an increase.

Unrequested credit card cheques

Another focus of the government plans is to tackle the sending out of credit card cheques to customers who have not asked for them.

Many credit card providers have started sending credit card cheques out along with monthly statements, and in some cases include suggestions to the cardholder that they could write themselves a cheque and pay it into their bank accounts to bump up their savings.

Any cardholder who follows this advice is shortly met with interest and handling fee charges for using the cheque.

Lyndsey Burton, from Credit Card Comparison Online, responded: "Credit card cheques are usually classified with higher rates of interests and fees similar to cash withdrawals.

"With many families struggling to keep on top of repayments, tempting people into using credit cards to meet mortgage and bill payments is incredibly irresponsible.

"To tempt cardholders to use credit card cheques for savings - considering the next to nothing savings rates available at the moment - is just ludicrous."

Other industry officials have also commented, including the Consumer Affairs Minister Gareth Thomas, who said recently: "We are concerned that people may be tempted to borrow irresponsibly if credit card companies increase borrowing limits without this being requested by customers, or send out unsolicited credit card cheques. It's vital we protect consumers at this time and we are exploring these issues carefully."

Another industry official said that in the current climate many people used these cheques to get themselves out of a tight financial spot. He added: "It also saves them having to admit to their money problems or speak to anyone about it, and because of that, they are prepared to pay the high costs associated with this type of borrowing."

If you've used credit card cheques or withdrawn cash…

Anyone who is struggling financially should consider a 0% interest rate credit card if they have a history of good credit and are currently employed.

0% balance transfer credit cards can be used to pay off existing credit card debts at higher rates of interest - and a transfer will cover any transactions incurred from using credit card cheques and cash withdrawals as well as purchases.

A select number of 0% balance transfer credit cards - those issued by MBNA such as the Virgin credit card or MBNA Platinum Plus credit card - offer the ability to transfer money to a current account and for this transaction to be classed as part of the 0% offer. These '0% current account transfer' offers allow cardholders to also pay off overdrafts and other non-credit card debt.

People who are unable to move to a promotional offer, whether through credit history or unemployment, are advised to avoid using their credit cards for cash withdrawals or cheques if possible.

If you have cheque or cash withdrawal transactions on your account, and you cannot transfer the balance to a lower rate, the best advice is to try and pay off the balance as quickly as possible - and vitally, remember that the way payments made to your account are normally allocated to lower rate balances, so try and avoid adding any new purchases to the balance or you will have to repay these first before you can clear the higher rate cash or cheque transactions.

Where to find out more information:

What is the allocation of payments clause
How to transfer money to a current account
What types of transaction are considered as cash withdrawals

Credit Card Comparison
Credit Card Guide
Credit Card News