New principles on risk-based repricing
Creation of breathing space for customers facing financial hardship

Following a successful meeting on 11 December between the credit card industry and Government, real changes for credit card holders who may be struggling to make their regular payments are announced.  This delivers on the industry’s commitment to draw up new principles made at the credit card summit on 26 November. APACS has published a fact sheet to explain exactly what has been agreed and what the changes mean for credit card holders. It is available from www.choosingandusing.com and www.apacs.org.uk.

Two changes have been agreed to help customers struggling with their finances in these challenging economic times, they reflect current industry best practice:

Breathing space for customers in trouble: the first is the creation of an agreed breathing space for any customer working with one of the free debt advice agencies to establish a debt repayment plan. This will give those customers a minimum of 30 days, whilst they agree a repayment plan, during which time the credit card company will suspend collection activity. If discussions remain ongoing after 30 days, there is an option of extending this by an extra 30 days to ensure agreement can be finalised. This change will be invaluable to customers when they are under the most stress.

Increased transparency on risk-based repricing: The second change will increase transparency for customers in the area of risk-based repricing. Many credit card companies use risk-based repricing to calculate the risk of lending an open-ended, unsecured line of credit to a customer whose financial position can change over time. Risk-based repricing can result in changes to the overall cost of credit to a customer. These agreed changes will ensure that customers will be notified when their interest rate is being changed as a result of risk-based repricing, and critically, if their interest rate goes up they will be given sufficient time to close their account or be offered an alternative product, where available. Credit card issuers have also agreed that they will not increase the interest rate on a card on the basis of risk during its first twelve months, or more often than six monthly thereafter. No risk-based repricing decisions will be taken after 01 January 2009 that do not comply with these principles.

We are now working to ensure these changes are built into The Banking Code so that they can be independently monitored.

Joanna Elson, Chief Executive of the Money Advice Trust says:

" We warmly welcome a new 'breathing space' when credit card companies will suspend collections activity for 30 days - and if necessary longer - whilst people in debt work with free independent debt advisers to come up with a workable repayment plan. The current economic climate means that more people than ever before will be needing help and support, and this appears to be a useful step forward.”           

Sandra Quinn, Director of Communications at APACS says:

“These changes will really help those customers who find themselves faced with real problems in paying money back that they’ve borrowed. But ideally we’d like to help ensure customers don’t get to this point. Although half of cardholders haven’t in the past few years used credit cards as borrowing tools – but if you do borrow on a credit card or plan to at this time of year – as so many of us do – make sure you know how you plan to repay it. Credit cards offer great flexibility for borrowing in the short-term but can be expensive if you borrow over a longer period. These changes do not mean that your APR will always remain the same, which is why it is important to check that you have the right card for you. Your APR is always a good place to start but interestingly only 25%* of credit card holders say that they know the APR, and therefore what they are being charged to borrow on their credit card.”

Ends

For further information contact the APACS Press Office:

Jemma Smith on t: 020 7711 6340 m:07811 113075

Sandra Quinn on t: 020 7711 6234 m:07768 044656

or press@apacs.org.uk

Notes to Editors

STATEMENT OF PRINCIPLES RELATING TO CREDIT/STORE CARD RISK- BASED RE-PRICING

The industry has developed these principles to cover the circumstances, alternative options, frequency and transparency of an interest rate increase.

Where we increase a customer’s interest rate, we will provide him/her with options.  These will always include the option to close the account and repay the remaining balance at the existing rate of interest, within a reasonable period, having regard to the existing level of minimum payments and the customer’s financial situation.  Where we offer alternative lending products, we may also provide the option to transfer the balance to such a product at the existing (or lower) interest rate.

We will not increase interest rates in the following circumstances:

Where a customer has failed to make the minimum contractual payment requested on the last two or more consecutive monthly statements; or

• Where an agreed repayment plan is in place in respect of the account; or
• Where we have been formally notified by a not-for-profit debt advice agency that the customer is in serious discussion with it.

Provided a customer manages his/her account in accordance with the product’s terms and conditions we will not:

• Increase interest rates within the first twelve months of a customer having a credit/store card;
• Increase interest rates more often than six monthly beyond this period.

We will always give a customer at least 30 days notice of an increase in interest rates, so that the customer can make other arrangements, should they so wish.

If the customer asks, we will ensure that our staff are able to provide the customer with an explanation as to why an interest rate may have been increased.

APACS is the trade body that gives banks, building societies and card issuers a forum where they can work together on non-competitive issues. We help manage the way that businesses and individuals in the UK move their money around - this covers cash, credit and debit cards, cheques and automated payments such as Direct Debits, salary payments and the new Faster Payments Service launched on 27th May for online/phone banking transactions and standing orders. We lead the fight against banking fraud and twice a year we publish figures on payment industry fraud losses.

The credit card industry has worked with the Finance and Leasing Association to ensure that risk-based repricing on store cards is also included within these principles.

* The research survey was undertaken by Research Now plc on behalf of APACS amongst 500 credit cardholders.