Nationwide Building Society has called for the Consumer Credit Bill to include a series of key measures that will help to stamp out bad practice and irresponsible lending, and create a fairer consumer credit system.  Nationwide wants to see the following included in the Bill:

• Outlawing of unfair order of payments on credit cards.

“Any debt counsellor worth their salt would tell a customer to pay off the most expensive debt first, so why should credit card providers be allowed to ignore this principle?”

• Requirement of credit card providers issuing ‘convenience’ cheques to include a clear and transparent ‘health warning’.

“Many credit card providers issue their customers with so-called ‘convenience’ cheques, which enable them to write a cheque which draws on their credit card.  What is not always clear to the customer is that spending on these cheques, compared with spending on the card as normal, is usually at a higher rate of interest, with a shorter interest-free period or none at all, and without the necessary consumer protection that applies for credit card spend.”

• Improve transparency around personal loans

“Many lenders offering credit cards or personal loans use risk-based pricing to establish the particular loan rate or card that they will offer a customer.  Loans in particular are often advertised at ‘typical’ rates, where up to a third of customers may receive a different rate from the one advertised.”

Stuart Bernau, Nationwide’s executive director, said:  “The new Consumer Credit Bill provides a great opportunity for the Government to tackle bad practice and unfair lending.  The industry has made good progress in recent years in improving transparency, but it has to realise that sometimes transparency is not enough.  Some practices, like applying payments to the cheapest debt first, remain unfair and can only be to the detriment of the consumer. 

“In other areas, like the personal loan market, considerable transparency improvements are needed.  We want to see a fairer and more transparent choice of loans and lenders for all borrowers.  We urge others to follow our lead by using the summary box, so that borrowers will be able to find the best loan without being credit scored."

 “I hope the Government will use this opportunity of a new Consumer Credit Bill to demand that the industry puts customers first.”

i) Outlaw unfair order of payments on credit cards

Almost all UK card providers currently allocate payments to outstanding balances at the lowest rate of interest, leaving items such as purchases and cash advances, to continue accruing interest at significantly higher rates.  Nationwide estimates that there are 10 million credit card accounts where this order of payments is costing the customer more interest than they need to pay – with credit card providers making an extra £500 million profit from this unfair practice.

Customers who cannot pay off the full balance on their cards may run up bigger debts than they expected, because any money they do pay towards their debt will go towards lower-interest balances (such as transferred balances, possibly even at 0% interest).  Purchases, cash advances and spend on ‘convenience’ cheques will carry on accruing interest.

Both the Office of Fair Trading and the Treasury Select Committee have previously warned that applying payments in this way, as much of the industry does, is unfair.  The Treasury Select Committee’s 2004 report into credit cards suggested that where payments do not go towards the highest interest elements of a debt, consumers should explicitly be ‘warned’ of this.  Similarly the OFT has previously suggested that the law might stipulate that payments are always assigned to the most expensive element of a debt first “unless it is expressly agreed between the borrower and the lender”.

Nationwide is the only major credit card provider to apply payments made to the highest-interest balances first across all our cards.  (Some lenders are able to do it on some of their cards but not all – showing that it’s clearly not impossible.)  We believe this is the only fair way to treat our customers and that applying payments in this way should be standard industry practice.  Any debt counsellor worth their salt would tell you to pay off your most expensive debt first, so why should credit card providers be allowed to ignore this principle?

ii) Require credit card providers issuing ‘convenience’ cheques to include a clear and transparent ‘health warning’

Many credit card providers issue their customers with so-called ‘convenience’ cheques, which enable them to write a cheque which draws on their credit card.  What is not always clear to the customer is that spending on these cheques, compared with spending on the card as normal, is usually at a higher rate of interest, with a shorter interest-free period or none at all, and without the consumer protection that applies for credit card spend under Section 75 of the Consumer Credit Act.  These so-called ‘convenience’ cheques are often issued to customers unprompted and without any effective warning of the terms that apply.  Nationwide believes that credit card providers who issue these cheques should be required to include a clear and transparent ‘health warning’ on the back of cheques, spelling out to the customer the terms and conditions of the cheque and highlighting that these are different from spend on the card itself.

iii) Improve transparency around personal loans

Many lenders offering credit cards or personal loans use risk-based pricing to establish the particular loan rate or card that they will offer a customer.  Loans in particular are often advertised at ‘typical’ rates, where up to a third of customers may receive a different rate from the one advertised.

Nationwide is concerned that many customers do not realise that they may not get the advertised loan rate when they apply.  A recent mystery shopping exercise, commissioned by Nationwide, found that in more than 40% of calls the lender couldn’t tell the potential customer over the phone what rate would apply, if they were accepted for a loan.

Lenders who advertise typical rates or use risk-based pricing should be required to obtain the explicit agreement of the consumer to the rate they are actually being offered before proceeding with the application.  Personal loan providers should also be required to use a summary box, similar to the credit card summary box recently introduced across the industry, so that customers can see at a glance what they will be charged, and can compare loans and shop around for the best rate without being credit-scored.

Nationwide has launched a summary box for all sales of new personal loans.  The summary box is the first of its kind for loans in the UK and will give borrowers an 'at a glance' summary of everything they need to know about a Nationwide personal loan, before they buy it.  Nationwide only has one rate for personal loans, so there is no doubt what rate a customer will get if accepted for a loan.

The Nationwide summary box includes details of:

• the interest rate a customer will be offered (assuming they are accepted for a loan)
  
  
• how much will be lent and how long for
  
  
• any arrangement and early redemption charges
  
  
• example costs of loan repayments and LoanCare cover.

For more information contact Sarah Atkinson, Public Affairs Manager, on 020 7826 2014.

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