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Tuesday, February 10, 2009

New credit card regulations mean a financial breather

By Tim Jones

The global economy has been plunged into an unprecedented crisis that has taken everyone by surprise by its rapidity and impact on both macro and micro levels. The financial downturn has made everyone take a look at how they do business - particularly the financial markets - as it has become clear that this particular recession has been led by an over-indulgence of easy credit over the past 20 years. The good times have rolled to a sudden and dramatic stop.

This particular recession has resulted in swift action by the government, anxious to prevent this downturn becoming one that is comparable with the Great Depression of the 1930s. Before the credit crunch really took hold of the economy, credit card lenders had come under increasing criticism for the way that they dealt with those who struggled to make repayments, often being accused of being heavy handed and draconian. Now it is becoming clear that, because of the sheer amount of personal credit card debt and the dramatic change in circumstances facing many people, more customers will struggle to keep up with payments. The government needs to keep the economy moving and to this end have insisted that customers in trouble have more protection and the time to take advantage of professional, impartial advice before becoming subject to stricter repayment enforcement by the lenders.

Under the new regulations credit card customers who have difficulties will be given a 30-day breathing space to take an opportunity to discuss their situation with the Citizens Advice Bureau. Here they will be able to receive free, impartial advice and guidance as to how they can negotiate an agreement with their creditors and arrange suitable repayment terms that take into account their financial situation. If an agreement cannot be reached within this period, there is a further 30-day buffer period during which the credit card lender cannot make payment demands until the situation is solved. However, if no agreement has been reached by the end of this second timeframe then the picture can become much bleaker and the lender has the right to pursue payment fully.

Another important regulation introduced by the government is an insistence that credit card companies do not change interest rate charges during the first 12 months of an offer being taken up. This regulation has come about as the direct result of complaints by customers who have been subject to significant raises in interest rates only weeks after taking up a promotional offer. Although increasing the interest rate is perfectly acceptable in law, the government may have seen it as somewhat unethical on the part of the lenders, particularly during a time of economic hardship and also at the point where the Bank of Englands base interest rate is at its lowest in its history. This is why they have insisted that interest rates remain stable for at least the first year of the offer.

These measures are designed to keep the wheels of the financial industry turning and are not altruistic on the governments part. With the threat of interest rate capping hanging over them as well, it is clear that the credit card lenders are becoming nervous about potential bad debt and these regulations may mean that the criteria for credit card applications become stricter. The credit card holder still carries full responsibility for managing their money and to meet payment terms and has to go into any financial agreement with their eyes wide open. Hard times do happen, and those who thought that the good times would continue indefinitely (both customers and lenders) have been proven wrong. A period of adjustment and a reconsideration as to how credit should be handled are now the order of the day. The measures will go some way to taking some of the pressure off those who find themselves struggling to meet repayments, but it may mean that credit in general becomes harder to obtain as the lenders try to defend their market positions.

How quickly these regulations have a direct effect on the credit card industry remains to be seen, although if the previous indicators are anything to go by they will be implemented very quickly. Credit card lenders will be looking to prevent future bad debt from becoming an issue and subsequently will be looking at credit history, financial stability and future prospects of their customers much more closely before granting credit. The credit card industry is going through a transitional period which, if handled properly, will mean a much more stable and sustainable market in the years to come. It also means that those who do find themselves in trouble have an opportunity to deal with the situation before it becomes a major problem.

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