New credit card regulations mean a financial breather
The recent economic downturn has taken everyone by surprise and its rapid descent into a full-blown recession has made financial institutions take a serious look at how they do business. In contrast to other recessions the general public have been hit much harder and much earlier than before. This is due to one simple factor " the current recession is the direct result of a flood of easy credit during the eighties and nineties. Now those financial chickens have come home to roost.
Extreme situations often call for extreme measures, and the last few weeks have seen a number of significant changes to the regulatory framework that governs the credit card industry. Before the credit crunch kicked in the credit card lenders generated a fair amount of criticism concerning the way they dealt with customers who got into financial difficulties and had problems meeting regular monthly payments. The industry had been accused in the past of being heavy handed in its approach towards customers who default on payments, but with the advent of a serious financial crisis it has become obvious that more people will find it increasingly difficult to stay on top of credit card debt. The government has stepped in surprisingly quickly in this instance, and has insisted that customers in trouble have more protection and the time to take professional advice before being subject to stricter measures by the lenders.
Under the new regulations all cardholders will be given a 30-day breathing space to give them the opportunity to take advice from the Citizens Advice Bureau. Here they will be able to receive free, impartial guidance as to how they can deal with credit card debt and come up with a workable plan to help them meet their financial commitments. If they cannot sort their financial situation out or come up with a deal that the credit card lender agrees to within that timeframe, then there is a further 30 day buffer period during which no payment demands can be issued by the credit card lender. This gives struggling customers two months to come up with a realistic financial plan without the worry of constant demands for payment from the lender. If, however, no progress has been made during this second 30-day period then the picture becomes bleaker.
The government has also brought in a second regulation stating that credit card lenders may not increase the interest rate charges within the first 12 months of an offer being taken up. This has come about as the result of complaints by customers about significant rises in interest rate charges only weeks after taking up an offer. Although legally the credit card lenders are perfectly entitled to raise the rates, the government perhaps considered it unethical to do so in the midst of an economic crisis and particularly as the Bank of Englands base rate is currently at its lowest level in history.
These regulations, although perhaps seen as a knee-jerk reaction by the financial institutions, are not entirely an altruistic act on the part of the government. The intention is to keep the credit card market viable but to minimise the exposure to bad debt for the lenders and to give the public some reassurance that they will not be subject to excessive interest rate increases and have a little room to manoeuvre if personal circumstances change for the worse. Combined with the possibility of interest rate capping, these actions may cause the credit card lenders to become stricter over lending criteria, making it more difficult to get credit in the first place. However, for those who have a good credit rating and are willing to take full responsibility for their finances, there are still some very good credit card deals to be had and the lenders still want to encourage custom, even in the middle of a recession. As long as the economy keeps spending, the full brunt of a complete economic collapse can be avoided.
The new legislation will have an impact on how credit card deals are presented to the public by the lenders, and perhaps this change in policy will lead to a more open and transparent lending system where people are made fully aware of their responsibilities right from the outset. Those with good credit ratings will still be able to continue to take advantage of credit card deals and as long as they manage their finances responsibly there should be no problem. The two 30-day periods that have been designed not for customers to miss a couple of payments but to re-establish a good relationship with their lender, are also a step in the right direction and should help to keep both credit card lenders and their customers happy.
Extreme situations often call for extreme measures, and the last few weeks have seen a number of significant changes to the regulatory framework that governs the credit card industry. Before the credit crunch kicked in the credit card lenders generated a fair amount of criticism concerning the way they dealt with customers who got into financial difficulties and had problems meeting regular monthly payments. The industry had been accused in the past of being heavy handed in its approach towards customers who default on payments, but with the advent of a serious financial crisis it has become obvious that more people will find it increasingly difficult to stay on top of credit card debt. The government has stepped in surprisingly quickly in this instance, and has insisted that customers in trouble have more protection and the time to take professional advice before being subject to stricter measures by the lenders.
Under the new regulations all cardholders will be given a 30-day breathing space to give them the opportunity to take advice from the Citizens Advice Bureau. Here they will be able to receive free, impartial guidance as to how they can deal with credit card debt and come up with a workable plan to help them meet their financial commitments. If they cannot sort their financial situation out or come up with a deal that the credit card lender agrees to within that timeframe, then there is a further 30 day buffer period during which no payment demands can be issued by the credit card lender. This gives struggling customers two months to come up with a realistic financial plan without the worry of constant demands for payment from the lender. If, however, no progress has been made during this second 30-day period then the picture becomes bleaker.
The government has also brought in a second regulation stating that credit card lenders may not increase the interest rate charges within the first 12 months of an offer being taken up. This has come about as the result of complaints by customers about significant rises in interest rate charges only weeks after taking up an offer. Although legally the credit card lenders are perfectly entitled to raise the rates, the government perhaps considered it unethical to do so in the midst of an economic crisis and particularly as the Bank of Englands base rate is currently at its lowest level in history.
These regulations, although perhaps seen as a knee-jerk reaction by the financial institutions, are not entirely an altruistic act on the part of the government. The intention is to keep the credit card market viable but to minimise the exposure to bad debt for the lenders and to give the public some reassurance that they will not be subject to excessive interest rate increases and have a little room to manoeuvre if personal circumstances change for the worse. Combined with the possibility of interest rate capping, these actions may cause the credit card lenders to become stricter over lending criteria, making it more difficult to get credit in the first place. However, for those who have a good credit rating and are willing to take full responsibility for their finances, there are still some very good credit card deals to be had and the lenders still want to encourage custom, even in the middle of a recession. As long as the economy keeps spending, the full brunt of a complete economic collapse can be avoided.
The new legislation will have an impact on how credit card deals are presented to the public by the lenders, and perhaps this change in policy will lead to a more open and transparent lending system where people are made fully aware of their responsibilities right from the outset. Those with good credit ratings will still be able to continue to take advantage of credit card deals and as long as they manage their finances responsibly there should be no problem. The two 30-day periods that have been designed not for customers to miss a couple of payments but to re-establish a good relationship with their lender, are also a step in the right direction and should help to keep both credit card lenders and their customers happy.
About the Author:
Tim Jones writes for various financial based websites and likes to report on changes and events in the credit card market. You can find further information on the credit card here.
posted by Credit Counseling at
4:05 AM
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