Consumer white paper proposes ban on credit card companies raising borrowing limits or sending out cheques without consultation

Credit card companies could be banned from raising borrowers’ credit limits without consultation or sending out unsolicited credit cheques in a bid to prevent people running up unaffordable debt, the government said today.

The moves are part of a consumer white paper, A better deal for consumers – delivering real help now and change for the future, unveiled today by the business secretary, Lord Mandelson, and the consumer minister, Kevin Brennan.

Credit card cheques would not face an outright ban, but companies will only be able to send them out on request by cardholders. The cheques, which can be used like personal cheques with the value of the transaction added to the borrower’s card balance, are controversial because interest charged on purchases is usually much higher than if a credit card had been used to make the same purchase.

Handling fees of about 2% of the value of the transaction are also often charged, and there is no interest free period. Consumers who receive the cheques unexpectedly are often unaware of the costs of using them.

The raising of credit limits without consent has also concerned consumer groups, who say lenders have made it too easy for some borrowers to run up huge debts.

Although some card firms have cut credit limits in the wake of the credit crunch, research published today by price comparison website uSwitch suggests that over the past 12 months millions of consumers have had their credit limits increased without requesting the extra cash.

The survey showed a third of consumers had their limits changed, with 90% of those reporting their lender had upped their limit by an average of £1,538.

As part of a review of the credit and store card industry, restrictions could also be placed on card companies increasing interest rates on existing debt.

New requirements will also be introduced for all lenders to check consumers’ credit worthiness before they advance money to them and to explain financial products fully.

The review will also consider whether minimum monthly repayments should be increased to help people repay debt quicker, and whether card companies should be forced to put repayments towards clearing the cardholder’s most expensive debts first.

Many lenders use repayments to clear money borrowed through interest free balance transfer and purchase deals, while new debts attract a higher rate of interest.

The government has also asked the Office of Fair Trading (OFT) to carry out a review of the market for high cost credit, such as pay day loans and door step lending, which typically charge interest of more than 50% on an APR basis.

The review of the industry, which could be worth up to £35bn a year, will look at competition in the sector and at whether consumers have enough information and protection when deciding to take on short-term debt. The OFT said it expected to report in spring 2010.

Another key proposal set out in the white paper is the appointment of a consumer advocate to lobby against bad practise by retailers and lenders. This is part of a range of measures designed to crack down on rogue traders and help consumers get their money back if they encounter problems.

Decisive action

Kevin Brennan said: “Consumers have been seriously affected by the past two years of turmoil in the financial markets, as well as by the longer term changes in the way that goods and services are bought and sold. We are taking decisive action now to prepare for the future.

“We are delivering a new approach to consumer credit with a review of the regulation of credit card and store cards. We are imposing requirements on lenders to explain their products and to check creditworthiness before they lend, and revised OFT guidance to tackle irresponsible lending.

“There will also be tougher action against rogue traders and fraudsters who look for ways to fleece consumers out of their hard-earned cash, and a new emphasis on consumer rights spearheaded by the consumer advocate.”

Mandelson said the government was determined to help consumers during the current downturn when family budgets were under “unprecedented strain”.

“We’re already providing targeted help to protect people from falling into debt and to support those who get into difficulty,” he said. “But we need to do more. Our aim is to help consumers make better informed borrowing decisions.”

To this end the government also plans to introduce a self-help tool kit, which will be developed by the Money Advice Trust, and a new Debtor’s Guide produced by the Insolvency Service for those struggling with their borrowings.

The Financial Services Authority‘s website will also be updated to make it easier for people to compare the cost of different credit cards according to the way they use them.

Credit card companies said they would continue to work with the government on changes to help consumers. Paul Rodford, head of card payments for the trade body the UK Cards Association said card providers would co-operate fully with a ban on credit cards “while also attempting to avoid negatively impacting customers who may wish to continue using them in certain circumstances such as for balance transfers on promotional rates”.

He added: “In the past few years we have made lots of changes to help provide better transparency on our products and to make sure we uphold stringent lending practices.

“The need to make responsible lending decisions and to support customers to make responsible borrowing decisions can never be more important than it is right now. It’s in nobody’s interests to lend to someone who can’t afford it or to have customers who are unable to pay back what they’ve borrowed.”

The consumer group Which? said it was glad to see the government addressing some of the issues it had been campaigning on for years, but the moves were overdue.

Its chief executive, Peter Vicary-Smith, added: “The important thing is that no time is wasted in turning these proposals into tangible benefits for consumers.

“The jury is out on the creation of the role of consumer advocate, for the devil is in the detail. It will be interesting to see how the role will fit in with the organisations and roles that already exist.”