We Should Learn A Lesson From The US

American financial watchdogs are planning a crackdown on unfair practices in the credit-card market. British regulators should follow suit.

In order to keep an eye on the financial news on the other side of the Atlantic, I often read the CNN Money website, home of Fortune magazine. This week, this story about a crackdown on credit cards caught my eye.

Card interest rates remain stubbornly high

The US Federal Reserve (`the Fed') has slashed its key interest rate this year. In fact, a further cut yesterday took it to between 0.2% and 0% for the first time in history. However, despite a series of deep rate cuts, borrowing on plastic is still relatively expensive in the US. (It's the same story on this side of the Big Pond, where the Bank of England's base rate is 2% a year, yet most credit cards charge more than 17% APR on purchases.)

In an effort to ease the burden on overstretched consumers, the Fed plans to introduce new rules to improve the treatment of cardholders. At a meeting on Thursday, the Fed will vote on the following proposals, to be introduced in 2010:

• banning lenders from raising interest rates on existing card balances unless payments are over thirty days late;
• stopping `double cycle' billing, which averages out balances from the current and previous monthly bill, enabling interest to be charged on the old balance, even it has been repaid in full;
• barring the use of negative payment hierarchies, where repayments go towards paying off the cheapest debt first;
• giving cardholders a reasonable amount of time to make payments; and
• banning `universal defaults', which allow card firms to increase the interest rate on one card simply because a cardholder is behind with payments on a different card.

Three cheers for the Fed

The Consumer Federation of America welcomed this news, arguing that it will help millions of American borrowers who are behind on their payments. Indeed, were I an American credit-card customer, I would be delighted by this improved consumer protection. In particular, I would welcome the introduction of positive payment hierarchies, which forces card issuers to apply payments to higher-rate debts first.

It's said that everything is bigger in America -- and this certainly applies to their credit-card debt. American adults owe around $976 billion to card companies, which is roughly £638 billion. In the UK, our total credit-card debt comes to about £54 billion. Hence, even after accounting for the fact that the US population is five times the UK's, it's clear that our American cousins are up to their necks in plastic debts!

With almost one in twenty (4.9% of) US credit cards in arrears and bad debts rising rapidly, US banks are predictably wary of any move to cut their profits. Hence, lenders have warned that these new rules could have a sting in the tail, in the form of higher interest rates and fees, plus reduced availability of credit. They could also mean the end of low-rate introductory offers and 0% balance transfers.

Finally, in Credit-Card Pact Could Bring in Fees, I revealed the changes to UK credit-card practices set to take effect in 2009. Personally, I believe that US regulators are taking a step in the right direction, as their proposals are far more radical than the watered-down concessions recently agreed by UK credit card issuers. Indeed, given that several British banks are now partly or wholly owned by taxpayers, our government should have squeezed UK lenders far harder!

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