Credit card firms face restrictions

Credit card industry to be reformed

Credit card companies could be banned from raising borrowers' credit limits without their consent to help prevent people running up unaffordable debts, the Government has said.

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

The Government will also consult on whether minimum monthly repayments should be increased to help people repay debt quicker, as well as looking at the order in which debts on cards are repaid, to ensure the most expensive debts are paid off first.

The moves were set out in the Consumer White Paper, which aims to promote responsible lending.

The paper also contains a ban on credit card companies sending out unsolicited credit card cheques, which can be used like personal cheques, with the value of the transaction added to the borrower's card balance.

Interest charged on the cheques is usually far higher than if a credit card had been used to make the same purchase, while handling fees often of 2% of the value of the transaction are also charged, and there is no interest free period.

The Government also said it would ask the Office of Fair Trading 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.

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.

Consumers will be given more help to make good financial decisions through a new 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.