Could proposed law cap credit card interest costs?

By Emma Lunn

In an attempt to stop credit card debt from spiralling out of control, a bill recently introduced to the House of Commons proposes limiting the amount of interest credit card companies can charge.

Under the bill, introduced by Labour MP Yvonne Fovargue on 27 November, once a borrower has paid out interest equivalent to three times the amount borrowed, all further payments would go directly to reducing the principle. In other words, once you pay a certain amount of interest on your credit card debt, no more interest would be added to the balance.

Could this bill become law? And what would be the consequences?

Does the bill have a chance?
Fovargue introduced her bill under the Ten Minute Rule. The Ten Minute Rule is a procedure in parliament for the introduction of private member's bills (laws proposed by members of the legislature instead of on behalf of the executive government) in addition to the 20 per session normally permissible. It is one of the ways in which a bill may receive its first reading.

The bill was given an unopposed first reading and listed for a second reading on 25 January. Ten Minute Rule motions rarely become law. But even if Fovargue doesn't fulfil her aim of it becoming law, her motion will highlight the problems that people can run into concerning credit card debt.

sarah-pennells

Yvonne Fovargue

"I want the 10-minute rule motion to highlight the role played by credit cards in getting people into chronic debt, where they can only afford to pay interest with no realistic prospect of reducing the principal," Fovargue wrote on her blog, "At a time when the media spotlight has fallen on the high interest rates charged by payday lenders, I maintain that mainstream credit card companies are not immune from responsible lending as the numbers of people in debt continue to rise."

What if it becomes law?
If the bill becomes law, it would mean that cardholders' debts could stop growing once they have paid more than three times the original amount borrowed.

"It would effectively limit the amount by which creditors can increase the size of a debt by the addition of the interest and charges where people are struggling," Fovargue said in her introduction of the bill to the Commons.

Fovargue disagrees with the notion that her bill would present an easy way out of credit card debt.

"It's not about letting people off lightly or allowing them to default on their debts," she said in her statement to the Commons. "Credit card companies will still get their profits. It's about giving people the guarantee that their debt will be paid off at some definite future date and it won't spiral upwards."

Data from StepChange Debt Charity show that the number of those seeking debt advice is down -- about 76,000 reached out for help in the first half of 2012, compared with about 81,000 in the first half of 2011 and 85,000 in the first half of 2010.

Although that seems like good news, StepChange also found that lower levels of debt are becoming more problematic for many families. The average debt load for households seeking help from StepChange dropped from about £13,000 in 2009 to about £10,500 in 2012. Why are these families reaching out for help sooner? StepChange surmises that debt levels that weren't problematic three years ago are now proving too much for many families.

That means interest charges on those balances could push a struggling household over the edge.

Although StepChange did not comment on the proposed law specifically, a spokesperson said that the organization "is supportive of measures that will begin to address the problem consumers being stuck in a long-term cycle of minimum payments."

What to do in the meantime
If Fovargue's bill does not become law, consumers are advised to pay off their balances -- or at the very least, make more than the minimum payment each billing cycle. Making only the minimum won't trap you in debt forever (new rules introduced in 2011 required the minimum payment to cover interest, fees and charges, plus 1% of the capital), but it could take a very long time to pay off debt this way.

For example, if you had a debt of £3,000 on a card with a 16% APR and repaid the minimum (£70) each month, it would take you about 18 years to repay the debt.

See related: 5 rules to follow if you're unemployed with debt, Credit counsellors share consumers' biggest credit card mistakes

Published: 11 December 2012