Page last updated at 22:10 GMT, Wednesday, 26 November 2008

Credit firms 'to help borrowers'

Credit card
The government wants to see credit card rates reduced

Credit card companies have agreed to do more to help borrowers struggling to pay their debts.

The industry is to report back to the government in two weeks to agree a set of "fair principles" to help borrowers.

Representatives met Business Secretary Lord Mandelson to discuss whether firms should further cut interest rates.

The principles will cover risk-based pricing, under which the interest rate charged is based on the risk of people defaulting on their borrowing.

Card providers also agreed to give extra breathing space to struggling borrowers by suspending debt collections for 30 days if a debt advice agency was working with them on a draft repayment plan.

Concern

The meeting was organised by Prime Minister Gordon Brown after the government said it was concerned that card rates were not going down enough and firms should do more to follow the recent cuts in UK interest rates.

"The government is deeply concerned that borrowers aren't getting a fair deal," said Consumer Affairs Minister Gareth Thomas, who also attended the meeting.

"That's why we've taken swift action to bring the industry in to look at how costs are being applied to people's existing debts."

The group made good progress in discussing the issue of risk-based re-pricing which is leading to high increases in some individuals' bills
Joint statement

Mr Thomas told the BBC that there was particular concern over irresponsible behaviour by one or two credit card companies, giving an example of one doubling the APR on one customers' borrowing while they were in debt.

He said that two-thirds of people paid off their credit card bill at the end of every month and were effectively enjoying interest-free credit.

Steven Sklaroff, director general of the Finance and Leasing Association which represents the sector, said the rate at which card companies lend was set by inter-bank lending rates, which are higher than the Bank of England's Bank rate.

He also pointed out the difference between store cards and credit cards. Store cards have higher rates to reflect the greater risk and because they offer other benefits, he said.

In a joint statement published by the government and industry after the meeting, they said: "The group made good progress in discussing the issue of risk-based re-pricing which is leading to high increases in some individuals' bills.

"They will develop a statement of fair principles in two weeks for risk based re-pricing decisions.

"Those principles would address issues such as proportionality, frequency and transparency. The purpose is to help borrowers manage their debts during the downturn."

There are 31 million credit cardholders in the UK, according to the latest statistics from UK payments association Apacs.

The Bank of England said that in the third quarter of the year 33.2bn was spent on credit cards, while 31bn of repayments were made.

The average amount spent in a credit card transaction is about 65.

The average interest rate charged on a credit card has risen to 17.6% from 17.2% in May despite the falling Bank rate and a less dramatic recent fall in the cost of inter-bank lending, according to market analyst Defaqto.

Research carried out by financial information group Moneyfacts showed that 10% of credit card providers had increased their interest rates since August.

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