Hidden costs of credit shake-up

NEW LAWS could make it harder and more expensive for people with poor credit histories to borrow money, a new report claims.

From the end of October lenders will have to abide by stricter regulations governing the consumer credit market. These include carrying out internal and external credit checks before raising credit limits, and in some cases turning down borrowers who ask for a higher credit limit.

Lenders will have to ensure that details of rates and charges are presented in plain English. They will also have to conform to a standard method of calculating the annual percentage rate (APR) so consumers can compare different products more easily.

The APR will have to be the most prominent figure displayed on adverts, while the amount of interest lenders can charge those who settle their debts early will be limited to one month, rather than the current average of two.

But Datamonitor, which carried out the report, believes the new laws could disadvantage many people who have struggled financially, by forcing lenders to put up rates and introduce stricter lending criteria.

It says the requirement to carry out even more credit checks before increasing limits will also reduce the flexibility of credit cards, and lead to many consumers going over their credit limits, resulting in penalty charges.

Oksana Selezneva, financial services analyst and author of the report, said the changes could particularly affect non-standard providers who lend to individuals with adverse credit histories.

She added: 'Such providers will face a greater number of challenges simply due to the riskier nature of their customers and will consequently increase their prices to cover the costs.

'It is in the interest of credit providers not to encourage bad debt and they are therefore unlikely to offer credit to customers whose previous repayment pattern indicates any level of personal indebtedness.'

Consumer Minister Gerry Sutcliffe insisted that the proposed changes will be good for the consumer, declaring that consumers armed with clear and detailed information from lenders will be better able to shop around for the best deal.

'These reforms ensure that at every step from the moment a consumer signs on the dotted line right through to when the agreement ends, they will have the fullest information possible about how much they need to pay and for how long. This will enable business and consumers to make responsible lending and borrowing decisions.'

The move is the first set of regulations being introduced as part of a Government shake-up of the consumer credit market. Further changes include a new signature box for consumers to sign if they are buying additional insurance products, such as payment protection plans, on credit. This will help to highlight any extra costs.

With UK consumer debt recently topping £1 trillion for the first time, many could be forgiven for thinking the new regulations come not a moment too soon.

In fact, the proposed measures have already come under fire from industry bodies for not going far enough. Earlier this year This Is Money reported how the Consumers Association had slammed the Government for 'missing a golden opportunity' to address and resolve problems in the UK consumer credit market.

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