It is one year since the Consumer Credit Directive (CCD) was implemented in the UK; its aim is to make it easier for consumer to compare products and make sound decisions about the credit on offer. The European Council wanted to create one standardised set of rules for credit providers within the EU.

The current climate has made it more important than ever to take out credit that suits an individual’s personal circumstances. The implementation of the CDD was designed to protect the consumer, and improve confidence in choosing the right unsecured credit product.

Unsecured credit is any sort of lending product where the borrower is not requirement to put an asset down as a deposit in the event of defaulting on payments. These could include personal loans, credit cards, and overdrafts. Secured credit is not covered by the CCD.

CCD Changes

The CCD brought several changes to the way that unsecured credit products were advertised, including ‘typical’ APR. The Directive also requires that all representative APR figures are accompanied by a representative example to show any charges etc.

This interest rate was what the majority of customers were offered, in fact more than 66% of applicants had to have been offered this typical APR. The CCD changed this to ‘representative’ APR, where just 51% of customers had to be offered that rate.

This is a significant change as fewer people applying for credit products will receive the representative APR that is advertised. Whilst 51% may technically still be classed as the majority of customers, it is a far cry from the 66% required previously.

The change from typical APR to representative APR has also led to lenders advertising very attractive credit card deals, offering as much as 22 months interest free. Whilst this is great news for those the rich and those with excellent credit ratings, it does not help those in more difficult situations. Almost half of applicants will not qualify for the low rates of APR being offered, and could be given much worse rates.

Certain consumer groups have actually accused lenders of promoting these 0% interest offers even more, now that they are aware that they have to give it to less people. The number of people taking up these great credit offers has nosedived since the introduction of the CCD.

Allowing credit card companies to decline more applicants is just one example of how the CCD has perhaps helped the rich obtain much better credit products, and leave the poor with worse rates. This statement is confirmed by the fact that despite the huge number of interest free and low-interest deals on the market, average credit card APR is actually at the highest it has been for more than a decade.

Consequences

This increase in the number of declined applications caused by the CCD changes could be partially responsible for significant increase in payday loans. These loans are short term cash advances, designed to tide consumers over until the next payday, and as such are only for short term borrowing.

Research has found that around half of payday loan borrowers are actually professionals and white-collar workers, with 7% of them being accountants and financial advisers. This is a far cry from the stereotypical image painted of students, those on benefits and unemployed, or with poorly paid manual jobs.

The typical or representative APR on payday loans usually reaches into the thousands, which compared to the offers being advertised by credit card companies, is outrageous. However, the payday lenders defend their APR as their credit is not designed to be for the long term, and therefore an annualised interest rate does not provide an accurate representation of the amount borrowers will need to repay.

The fact that professional workers in administration, management, and sales, amongst doctors and financial advisers, are taking out payday loans suggests that the implementation of the Consumer Credit Directive has actually caused hard-working people to be refused affordable means of borrowing. The total number of borrowers has risen significantly in the past 12 months and led to a boom in the payday loan industry.

The CCD was always intended to make the unsecured credit market much more transparent and easier to compare products. Whilst it may have achieved this to a certain extent, it has also led to more people turning to payday loans due to refused products, but on the other hand increased marketing of great rates for the rich.

	Written by :
	Jemma is a news & research reporter for compareandsave.com. Having worked as a journalist on a number of personal finance websites; she now spends time researching and commenting on UK personal finance stories and investigating new ways to help our readers save money. For press enquiries, please visit our Media Centre page.

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No one can deny that 2011 was, in many respects, one the toughest ever years financially for people, businesses, and governments around the world. However, it also saw consumers benefit from some of the longest interest free balance transfer periods on credit cards ever seen, the new Consumer Credit Directive change the balance of payments hierarchy for everyone benefit. So given the mix of tasty fruit and banana skins 2011 offered we thought we’d look into our crystal ball to give our view as to what 2012 might hold for UK personal finance.

Double Dip Recession?
The main thing everyone wants to know is whether the UK will slip back into another recession and there are as many answers are there are experts on the subject. Our answer is, “possibly” – although don’t quote us on that! Yes, you want more information than that but it’s impossible to give a definite answer. Some analysts are predicting that whilst the Eurozone may end up in recession, the UK could come out of it relatively unscathed. Whereas others believe that the UK will be just as badly affected, as things will get worse before they get better, with the second dip being even tougher than the first in 2008.

Either way UK personal finances are more likely to be affected this year by Government cuts and public sector job losses. The private sector is not in a position to pick up the pieces and even if it were it would be questionable whether private sector wages would match Inflation, which rose to a record high towards the end of 2011. Although it is thought that this will decrease throughout 2012 it will continue to put pressure on households to tighten their belts and get more finance savvy.

Personal Debt
The total UK personal debt decreased by 0.02% to £1451bn from October 2010 to October 2011 and the average household debt decreasing by just less than 7% to £7,984 (excluding mortgages). The average consumer borrowing on credit cards and other forms of unsecured finance also decreased, down to £4,226 per average UK adult. Despite this slight decline in the amount owed by UK consumers, the Office for Budget Responsibility (OBR) still predicts that household debt will increase to £1823bn by end of 2015, and £2045bn by Q1 2017.

These statistics from Credit Action coupled with the fact that three in ten of us decided to go overboard and plunge into debt for Christmas and New Year, make it look likely that personal debt will deepen further into 2012. Research has shown that it takes most of us around six months to pay off Christmas debt, with 8% of us still struggling with it 12 months later. So, it looks like 2012 will be just as tough on our wallets as last year. Ouch!

The Housing Market
The figures published at the end of 2011 suggested that house prices were on the rise as did the gross mortgage lending reported by the Council of Mortgage Lenders (CML). The CML went on to say that it did not know what to expect for the remainder of 2012 as economic uncertainty was expected to widen. However, there is some good news for mortgage holders though as the Bank of England base rate is expected to remain at 0.5%.

Savings & Investments
If predictions are correct and the Bank of England base rate does stay at its record low for some time, savers could struggle to see the benefit. On the plus side inflation is expected to fall, which is good news as the value of your savings should at least stay intact. Due to the poor savings climate it is more important than ever that you take full advantage of your ISA allowance.

Finance Bill 2012
One of the most important things on the 2012 agenda for personal finance is the Finance Bill 2012. The draft legislation for consultation was released by the Government in December, and is expected to be published after the Spring 2012 Budget in March.

There are a number of changes on personal tax, corporate tax, and charities included in the Finance Bill 2012, a summary of the draft legislation is below.

Personal Tax
• Income tax thresholds and rates will be updated
• Details of the 50% tax relief scheme for SMEs (Seed Enterprise Investment Scheme) will be unveiled
• Statutory resistance test delayed until 2013
• Inheritance tax nil band and capital gains tax exempt amount to increase with RPI from 2015/16 and 2013 respectively

Corporate Tax
• Main corporation tax rate to reduce to 24% in 2013
• Improvements to Research & Development tax relief for SMEs
• Easing of conditions relating to real estate investment trust
• Bank Levy to increase to 0.088% from January 2012
• Changes to UK accounting practice

Charities
• Tax liability reduction
• Rate of inheritance tax to decrease to 36% when 10% of an estate is left to charity
• Withdrawal of Self Assessment Donate Scheme in April 2012.

What can I do?
With all the uncertainty it is tempting to simply shrug our shoulders and say, “…it’s out of my hands.” but that’s not the case. Worry about your little bit. If you can get you finances ship shape when everyone else is struggling there will be opportunities. Perhaps a bigger house, cheaper stocks & shares, bargains in the shops, but you’ll need to be in control of your finances to take advantage – Anything else is simply an illusion.

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When you look to take out loans, you should have two up-front goals: paying back the money as quickly and as cheaply as possible.

In some cases you may be faced with the option of refinancing, or getting a new loan at a cheaper interest rate. In some cases this is a very worthwhile option and can save you hundreds or thousands of pounds (as with a cheaper mortgage). In other cases, fees and early repayment penalties may offset any savings from a lower interest rate. So if you are considering refinancing, be sure to consider all the costs involved rather than just the interest rates.

With the advent of the Consumer Credit Directive in 2011, some things have changed when it comes to borrowing money. It is now easier to compare unsecured loans as well as credit cards because of the way that lenders and card issuers have to quote interest rates. For example, if a rate is quoted in an advertisement, it has to be the rate that at least 51% of applicants could reasonably hope to get. The idea is to make it harder for lenders to display one interest rate to borrowers, only to make the actual offer at a higher rate.

Additionally, with new loans, early repayment penalties may not be more than 1% of the amount of the credit that is repaid early, or no more than 0.5% if the repayment is made within the final 12 months of the credit agreement. If you have an older loan, the early repayment penalty cannot be more than two months’ interest, meaning that the huge repayment penalties that were in many older loans no longer apply.

What these changes mean for consumers is, taking out a personal loan for debt consolidation or some other purpose should be a more transparent process than it used to be. The same is true whether you’re taking out a new loan, refinancing an older loan, or attempting to combine two or more high-interest loans into one loan with a lower interest rate.

But this does not automatically mean you should ditch any older loan with a higher interest rate than what you can get now. Interest rates for personal loans are higher for lower principle amounts. For example, a £3,000 personal loan will generally have a significantly higher rate than a larger loan. Rates tend to drop at the £5,000 to £7,500 level, so it’s more likely you’ll save enough to make it worthwhile if you’re seeking a loan for a higher amount – but remember to only borrow what you need!

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The Consumer Credit Directive (CCD) has made strides toward making personal loans and their terms more transparent to borrowers. Borrowers may not notice much of a difference in terms of applying for loans, but they should be aware of the changes that the CCD has wrought.

One of the main things that borrowers should be aware of is that lenders must offer the “advertised rate” to only 51% of successful applicants. It used to be 66%, so there is a slightly greater chance that borrowers will not get the advertised interest rates.

Lenders are also required to provide information to potential borrowers about interest rates and credit checks before they sign for a loan, and it’s in a standard format so that consumers can compare loans more easily.

Before a loan is extended to a borrower, the lender has to explain various aspects of the loan to the customer, including information about the total cost of the credit and the consequences of non-payment.

Under the CCD, consumers will be able to change their minds for up to 14 days after signing a loan agreement. However, they will have to repay the credit plus any interest that would have accrued during the “cooling off” period.

Overall, these changes are intended to give borrowers better information, and the standardised requirements mean that potential borrowers can compare unsecured loans with far more ease than they could before the CCD.

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New rules for creditors go into effect in 2011 due to the new Consumer Credit Directive, and they affect your credit cards and loans. Here is an overview of the changes, and what you, as a consumer, should expect.

Creditors must now provide a full explanation of the credit being offered, and consumers will have the right to cancel within 14 days of agreeing to credit terms. Consumers will be informed when their debt has been sold, or when creditors check potential borrowers’ credit worthiness.

Starting in January, credit card issuers have to pay off customers’ highest interest debt first on cards where different types of borrowing carry different interest rates. They must also notify customers twice, on different occasions, of interest rate increases and give customers 60 days to reject the increases and cancel their cards. Customers will have to be given a reasonable amount of time to pay off the debt on the cancelled card.

From 1 February 2011 Credit card issuers must  advertise rates that are representative, meaning rates that more than 51% of applicants are eligible for. They must also account for things like annual fees in calculating their rates, to give consumers a more representative APR when they compare credit cards.

But don’t think that card issuers won’t try to make up potential revenue lost as a result of the Consumer Credit Directive. Many of them are introducing new fees that won’t be affected, such as “dormancy” fees and increased charges for foreign currency exchanges.

For example, Santander will start charging store card customers £10 if they let their cards lie dormant for 6 months. Retailers like Debenhams and Topshop are following suit, making it harder for shoppers who only use cards for introductory offers. To get around this, customers should take advantage of introductory discounts on store cards, pay the bill in full, and then cancel the card.

As for foreign exchanges, card providers have started setting their own exchange rates for credit card customers, making foreign transactions cost more.

The Consumer Credit Directive is designed to protect consumers, but consumers should also be alert to creditors adding new fees in attempts to make up lost revenue.

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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.

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Often, you do not need to own a house to get an unsecured loan. Unsecured loans, also known as personal loans, are loans that do not require collateral of some sort (such as a house) as a condition of borrowing. Secured loans do require collateral, and often this collateral is in the form of a house. The big danger with a secured loan backed by your house as collateral is that you could default on the loan and lose your house.

If you are self-employed, or if your credit history is less than pristine, then you may have no choice but to seek a secured loan (assuming you own a house or something else that could be used as collateral). But if you have the credit history for it, an unsecured loan is not only possible, but desirable in most cases.

Cheap loans are unfortunately harder to come by than they were a few years ago due to the credit crunch. Lenders are more selective, and loan applicants with less-than-stellar credit ratings may find they’re faced with high interest rates. That’s why it is so important that you compare personal loans before signing anything. Compare not only interest rates, but fees as well. Sometimes an interest rate can be deceptively low, because the lender makes it up by taking large fees, although this will become less of a problem when the display of  Representative APRs is made compulsory in February as part of the Consumer Credit Directive. Compare all loan costs before choosing a lender for your unsecured loan.

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New regulations adopted by the European Union in 2008 come into effect in the UK from 1 February 2011.  One of the most important changes contained in the new directive is the requirement for financial services providers to include a ‘representative example’ when advertising financial products.

‘Representative Example’ defined

The Department for Business, Skills and Innovation (BSI) guidelines say: “If an advertisement includes an interest rate or any amount relating to the cost of credit, it must also include a representative example. This must contain certain standard information including a representative APR.”

It will apply to the vast majority of advertisements for any product covered under the Consumer Credit Act for credit under £60,260 (loans, credit cards, etc).

What information will be included in a ‘representative example’?

The standard information which will be included in a ‘representative example’ will include:

•    The interest rate – a fixed or variable percentage, applied on an annual basis
•    Any Total Cost of Credit (TCC) charges – details of any fees or charges included
•    Total amount of credit
•    Representative APR

What’s the idea behind a ‘representative example’?

The aim of a ‘representative example’ is, according to the BIS: “to ensure that important information concerning the cost of the credit can be viewed together as a whole, so that the borrower can assess suitability and affordability in the round.”

It is designed to make it easy for consumers to compare the true cost of financial services products from provider to provider and from product to product.  The requirement for the ‘representative example’ to be more prominent than other information on the advertisement also now makes it the most important item on a financial services advert – the APR figure will no longer take prominent position.

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From 1 February 2011, financial services providers in the UK will be subject to a new set of guidelines.  The grandly named Consumer Credit (EU Directive) Regulations 2010 makes various changes to the way financial services companies advertise their products.  One of the most important parts of the new legislation requires companies to include a ‘Representative Annual Percentage Rate (APR)’ on their adverts.

What products do the new rules apply to?

The new Directive applies to advertisements and credit agreements for all loans to consumers under £60,260 excluding  agreements secured on land, certified business loans and investments regulated by the FSA.

It will include items such as personal loans, smaller secured loans and credit cards.

What is a ‘Representative APR’?

Companies can often charge consumers different APRs for the same product.  For example, if credit card or personal loan rates are determined by your credit rating or your income, you may not pay the same rate as someone with a lower income or superior credit history.

APR figures in the UK have also often been misleading as they don’t always take into account certain fees, such as annual charges or credit card ‘balance transfer’ fees.

The Department for Business, Skills and Innovation (BSI) defines the ‘Representative APR’ as: “an APR at or below which the advertiser reasonably expects, at the date on which the advertisement is published, that credit would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement”

In simple terms, where the APR for a loan or credit card can vary depending on an individual’s personal circumstances, the APR that is stated on an advertisement must represent at least 51% of the business that the financial services provider expects to come from that advert.  A representative APR will also take into account other charges associated with the product, for example, balance transfer fees, and will be based on an EU average credit limit of £1,200 (unless known to be lower).

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Over the weekend, the RBS and NatWest brands dropped their 0% balance transfer (BT) periods from 16 months to 15 months. RBS/NatWest is the first major issuer to lower rates on its 0% BT cards since competition between issuers pushed up 0% Balance Transfer lengths to 16 months. Is this likely to start a trend downwards among other issuers, or will others still want to maintain market-leading products to acquire new customers?

As RBS/NatWest was one of the first major issuers to move to sixteen month 0% Balance Transfer cards, they have probably acquired a significant quantity of new customers. At the height of the financial crisis, they restricted their offers to existing customers only, so they have tended to be fairly cautious on the acquisition side. On the other hand, the change could signal that they are concerned that the UK economic recovery is starting to plateau.

They may also be preparing themselves for a slightly bumpier ride as we move into the end of the year and the beginning of next year. The government’s Comprehensive Spending Review, due to be announced on 20th October, is likely to detail significant public sector job cuts. The unemployment rate is tracked carefully by credit card Issuers as there appears to be a direct correlation between the rate of unemployment and the rate of credit card payment defaults. Early next year, the VAT rise to 20% on 4th January will impact consumers’ purchasing power. The implementation of the new Consumer Credit Directive on 1st February 2011 is also likely to impact credit card issuers, although exactly how is still a matter for debate (and will be the subject of later blogs).

Time will tell. It will be interesting to see how the other issuers respond to the RBS and NatWest change and whether it will result in a lowering of market-leading BT periods. Alternatively, other issuers, who have to date this year been relatively quiet, may take advantage and fill the gap. It will also be curious to see whether any changes have any follow-on impact to the 0% Balance Transfer and Purchases, the so-called ‘dual hook’ products (discussed in a previous balance transfer and purchases blog).

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