The new Consumer Credit Directive takes effect no later than 1 February 2011. Card issuers are encouraged to adhere to the new rules as soon as possible, but all must comply by 1 February. This new directive will affect your credit cards, including cash back credit cards in several ways.
First, the Directive states that lenders have to advertise a ‘representative example’ of the cost of credit. That means when they show you an interest rate, they will have to include fees or charges in their calculations. For example, if a card charges an annual fee that is not reflected in the advertised interest rate, the lender will have to change the advertised rate to include the cost of that annual fee. It may not sound like much, but with some cards it can represent up to a couple of percentage points’ difference in the advertised annual fee, and this will make it easier for you to compare credit cards.
It is unclear how the industry will interpret this directive regarding 0% balance transfer cards. All charge fees for transferring the balance, and when you incorporate the fee, 0% is not accurate. The advertised APR is defined as the one relating to most transactions (available to more than 51% of applicants), so it would not necessarily apply to all cards. This is a change from the current definition of ‘typical APR’ which is defined as the APR that at least two-third of applicants can expect to receive.
One aspect of the Consumer Credit Directive that will affect you, whether you use a cash back credit card, or any credit card, is that you must be notified of changes in interest rates before the changes take place. Currently the credit card issuer must give you 30 days’ notice, but this will increase to 60 days. Also, your credit card provider used to have to tell you at least once about an impending change. With the changes in place, your credit card provider has to notify you of any interest rate increases at least twice. If you don’t agree to the interest rate change, you will have the option of closing the card and must be given a reasonable amount of time to pay off the card debt.
The order in which payments are applied to different interest rate debts on your card will be set so that higher interest rate debts are paid off before lower interest rate debts. There was no rule about this before, and almost all credit card providers directed payments towards the cheapest debts first, prolonging the higher interest rate debts. This will soon be a thing of the past.
The Consumer Credit Directive should be a positive step for consumers who use credit cards, by making credit card lending more transparent and understandable.
