Rate-jacking rules USA style

Also see the guide: How to fight unfair rate-jacking

The UK credit-card summit called by Peter Mandelson a few weeks ago had some rather paltry results. Now, as I’ll explain in a moment, the US has launched a similar new set of rules and perhaps we can learn something from them.

Our own summit produced very weak guidelines. Either the government doesn’t understand the practical realities of credit cards, or it couldn’t push the plastic providers into any real results so just had to get them to codify what is, in most cases, existing practice. The rules include:

  • Card companies should honour the interest rate given for the first year and not increase it (this one isn’t too bad, but generally follows the older ‘treat companies fairly’ system. It doesn’t mean get a cheap card and you should stick with it.
  • Companies will agree to give 30 days breathing space if people go to the debt counselling agencies (see the debt help guide for details of those).
  • They will notify customers in advance of rate hikes (wowee, how kind).
  • If they are increasing the interest they will allow customers to close accounts or offer them an alternative form of payment (e.g. a loan) at the current rate (as credit card rates are usually much higher than loans this isn’t a great deal).
  • Sadly I’ve not seen any mention of not cutting credit limits below people’s existing debt levels and then demanding payment, that may have helped. Yet the most laughable thing discussed in the summit was the idea that lenders should reduce rates in line with base rate cuts.

    The following is from a press release I put out as the summit took place to comment on such a farcical idea.

    “Credit cards and UK base rates are like rabbits and sofas: nowt to do with each other. This is why the Government’s reported call for the ‘base rate cut to be reflected by card companies’ is bizarre and irrelevant.

    “Until recently, the base rate was 5%, and many high street cards are 18% APR; in other words, they were charging three times the base rate. In the last couple of months, the Bank of England’s dropped the rate by 2% points to 3%. Even if credit card rates were also cut by the same 2%, they’d still be a mammoth 16%. The impact on most borrowers would be paltry, plus it’d actually leave the rates proportionately higher, with credit cards charging over five times the base rate!

    “If the Government really wants to make a difference, we need the rates cut by at least the same proportion, and sadly today’s talking shop won’t come close to doing that.”

    The USA style

    It can’t be a coincidence that the US senate has just released a similar set of rules to counter what’s called “rate jacking” over there. The one big difference though is that in the US rules, not only do the card companies have to hold the initial rate for the first year, but they then can’t increase the rate for any debts run up in that first year.

    Mr. Mandelson, how about that one?

    Then again, after four years of studying the plan, laughably it’ll only be introduced by July 2010!

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