Surcharges for paying by credit card are now banned and we've also seen the introduction of a ban on using credit cards to gamble.
Credit card companies must also support customers who are in persistent debt, with the option to suspend their cards if customers refuse to engage with this process.
However, despite numerous political conversations, there are still no plans to cap interest rates on credit cards in the UK.
Politics of credit cards
Credit cards have frequently been used as political footballs.
Irresponsible lending on credit cards was a feature of all three major party manifestos in 2010, although action from the Conservative and Liberal Democrat coalition didn't follow through on reforms to credit card interest rates.
Instead, they focused on high-cost credit, with a payday loan cap included in the Banking Reform Bill in 2013.
Yet research conducted just after the 2010 election found that 77% of respondents were in favour of interest rate caps on credit cards.
Part of the reason that ministers have been historically reluctant to act on credit card interest caps is that they may push people towards more expensive (or even unregulated) methods of borrowing instead.
The theory is that if borrowers are unable to find credit card deals available to them, they will move towards payday lenders or illegal loan sharks to make ends meet.
It's true that other changes have been made to stop customers being caught out by surcharges or falling into persistent debt as we cover in more detail below.
However, despite the periodic calls for caps on credit card interest rates as we saw in 2017 from Labour, these haven't yet come to fruition.
We've got more on different credit card terms and what they mean or read about the Consumer Credit Directive and the protections it introduced on interest advertising and representative APRs.
Controversies
Negative news stories about credit card debt and providers frequently make the headlines, with individual companies and credit cards themselves in the crosshairs.
Some providers have historically promoted unsuitable methods of borrowing such as:
- Barclaycard seeming to encourage cash withdrawals, even though they are an expensive form of borrowing
- Halifax offering a balance transfer deal that was said to encourage extra borrowing
- Nationwide crediting customer accounts with £20 on the proviso they spend £1,000 on their cards
Although these specific examples are in the past and lenders are generally much more careful on how they promote borrowing among their customers these days, they still demonstrate that credit card advertising gimmicks can be detrimental to customers.
We've seen similar issues occur more widely with data sharing controversies and the rise of reward cards for customers with poor credit both causing consternation around ten years ago.
The Financial Conduct Authority (FCA) even warned in 2014 that customers were being worn down by marketing to take on credit cards that they did not necessarily need.
Ban on surcharges
Action was taken in 2018 to ban surcharges when paying by credit or debit card.
Many retailers and service providers charged a fee if a customer wanted to pay with a credit card, ostensibly to cover the extra costs of those transactions for the retailer, yet these were deemed to be unfair and a ban was brought in.
However, research a year later found that customers were still being asked to pay illegal surcharges on some transactions.
Critics of the ban warned that retailers would simply raise prices for all to recoup the lost revenue, meaning those who used cash would be unfairly penalised instead of those who used card to pay.
Anecdotal evidence suggested some retailers simply switched to a service charge for all customers instead - something that is still entirely legal.
Persistent debt
One of the most significant regulatory interventions in the credit card sector has been the introduction of rules on persistent debt.
This was brought about following an FCA study into competition, affordability and marketing, with rules set about how credit card companies should handle customers deemed to be in persistent debt.
Essentially, the rules say:
- If customers are in persistent debt on their credit card for 18 months, they will receive a letter from their lender to remind them of the benefits of repaying more quickly
- If customers remain in persistent debt for another 18 months, the lender will get in touch again to set out the ways a customer can repay their outstanding balance and provide details on how to access free debt advice
So, after 36 months of persistent debt, credit card providers are compelled to act to help customers get on top of their debt.
The possibility of credit card companies making unreasonable demands of customers and pushing for repayment was acknowledged by the FCA.
In February 2020, they wrote to card providers to warn them to treat customers fairly and not treat it as a cut-off point for those in debt.
While providers do have the option to suspend a customer's credit card under persistent debt rules, this can only be done under two clear sets of circumstances:
- If a customer doesn't respond to their letters and proposed options
- If a customer confirms a repayment option is affordable and yet refuses to increase their payments
Credit card providers are walking a tightrope of needing to support customers to get their debts under control while being required to treat customers fairly and not impose blanket bans or suspensions.
However, these regulatory steps to help customers get out of persistent credit card debt were generally welcomed by debt charities and offer a useful nudge for customers who have debt problems but are struggling to deal with them.
Read more about how we're managing our debts and the rules on mental illness and debt.
Store cards
Store cards are credit cards that can only be used with one retailer and offer rewards related to that retailer.
These cards work differently to normal credit cards because:
- They have restricted spending power and can only be used for purchases at the named retailer
- They come with incentives such as money off vouchers, discounts on spending or gifts
In addition, the interest rates for store cards are often higher than standard credit cards.
Proponents of store cards say they are an efficient way to capitalise on spending at one particular retailer, with the discounts and offers available benefiting customers who prefer to shop at that retailer.
There are a few store cards in the UK open to new customers but not many.
Big names like Argos and Very offer them with representative APRs of 34.9% at the time of writing.
It's important to note that there's a difference between retailer branded credit cards like the ones offered by Sainsbury's or Marks & Spencer and the store cards we've discussed here. Branded credit cards can be used at any retailer while store cards are exclusive to one retailer.
Incentives banned
Although store cards were common at big retailers in the past, their popularity has dipped in recent years.
This is partly due to a voluntary ban across major retailers to stop offering immediate discounts and special offers at the point of purchase in 2011.
Before that, retailers were able to offer immediate incentives such as a % off the current shopping basket a customer was paying for.
The change meant that many customers didn't feel the same temptation to sign up, especially as retailers seemed to struggle afterwards to make the reward element of the cards worthwhile or enticing enough.
There was also a ban on direct commission to sales staff for signing customers up to store cards in September 2012. This reduced the incentives for staff to sign people up, meaning there was less of the "hard sell" that some customers had felt they were being subjected to.
Collapse of big names
Another issue that has accelerated the decline of store cards is that many of the brands who used to offer them simply don't exist anymore.
In the past few years, we've seen the collapse of big names like Debenhams, Burton, Topshop and Wallis - all of whom offered store cards to their customers.
Even if the brand name itself was rescued (as Topshop was by Asos), the store card element of the service was usually discontinued, taking that card option from the market.
Gambling with credit cards
Most gambling with credit cards is prohibited in the UK.
A ban on this was recommended by the Gambling Commission in 2018 and it came into force in April 2020.
The only exceptions to this ban are lotteries run to raise money for good causes, with the National Lottery, local lotteries and scratchcards exempt as long as they are purchased as part of a wider shop.
It was acknowledged that, because those types of gambling are usually undertaken alongside purchases of other items, it was difficult for retailers to police.
However, in a consultation response on changes to the gambling act in 2021, UK Finance acknowledge that some customers were finding ways around the ban and recommended action should have a wider focus.
Landscape shift
The landscape on gambling with credit cards has changed dramatically since 2009 when Lloyds TSB (as they were then) sent out a letter pointing out that customers could use up to 50% of the credit limit for transactions including gaming chips.
Gambling with credit cards was inherently risky for several reasons:
- It gave customers more easily accessible money to gamble with
- Many lenders classified gambling transaction alongside cash withdrawals, so the interest rate on them was higher
- Charges levied by credit card providers could increase the financial burden on customers and lead to them chasing their losses
Ultimately, the Gambling Commission was won over by these arguments and confirmed that betting with credit cards should be outlawed.
Summary: Evolution of regulations
Credit cards remain an important part of many people's finances.
The FCA's 2020 Financial Lives study found that 21% of UK adults (11.1 million) had held a credit card without paying off the balance in full during the previous 12 months. This made it the second most popular credit product after an overdraft.
Tighter regulation on credit card interest rates seems to hit the headlines on every election cycle, although critics of these caps make valid points about pushing customers towards more expensive forms of debt.
Over the past five years we have seen:
- A ban on surcharges for paying with credit cards
- A ban on most forms of gambling with credit cards
- Rules introduced to help customers get out of persistent debt
These changes were the result of long-running campaigns and policy shifts, signalling how difficult it is to move things forward quickly when it comes to regulating personal finance issues.
With that in mind, it's possible we could see a cap on credit card interest rates at some point in the future, but it will take time to discuss and implement.
It will also be interesting to keep an eye on the FCA's response to persistent debt customers and to see how many are being helped to get out of debt or whether the rules are simply not working for the benefit of customers.
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