U.K. Credit-Card Companies Bow to Brown, Curb Borrowing Costs

By Robert Hutton

Dec. 12 (Bloomberg) -- U.K. credit-card companies, under pressure from Prime Minister Gordon Brown to help customers struggling to repay debt, said they would limit interest-rate increases to twice a year.

After meeting yesterday with Consumer Affairs minister Gareth Thomas, card issuers including HSBC Holding Plc, Barclays Plc, Royal Bank of Scotland Group Plc and Lloyds TSB Group Plc said they would work on a new code of conduct about how and when customers would be notified about rate changes.

The measures may limit the ability of banks to raise lending rates as Britain slides into recession and defaults on credit-card debt mount. Brown is frustrated that banks haven’t passed on to consumers lower Bank of England borrowing costs.

“These changes will not be without financial pain for credit-card companies,” Thomas said in a statement issued by his office in London. “It was vital that we nipped in the bud the bad practices that were causing real hardship for borrowers.”

The lenders agreed that starting Jan. 1 they won’t raise rates on customers who miss payments or are receiving counseling about their debts. They also won’t increase rates more than once every six months and will give 30 days notice of an increase, the Department of Business, Enterprise and Regulatory Reform said.

“What has been agreed will make a big difference to credit- card holders who are facing difficulties paying their credit card bill at a time when they most need it,” said Jemma Smith, a spokeswoman for Apacs, the industry’s lobby group.

Rate Gap

The Bank of England has cut its benchmark lending rate 3.75 percentage points to 2 percent, the lowest since 1951, in the past year. Credit-card firms have lifted their annual percentage rate charged on balances by 0.7 percent during the same period, according to PriceWaterhouseCoopers, an accounting firm.

About a quarter of consumers expect difficulty making repayments on their cards, suggesting “charge-offs” where issuers write down bad debts will increase, the firm said.

“Conditions remain extremely tough for lenders in the current market,” said Richard Thompson, a partner at PriceWaterhouseCoopers. “We expect that any reduction in APRs coupled with the prospect of increasing charge-offs will lead issuers to consider annual fees.”

Among the current “best buys,” according to the consumer Web site Moneyfacts.co.uk, is a card from Barclays charging zero percent interest for 14 months, after which customers move to an annual rate of around 14.9 percent. HSBC offers zero percent for 13 months, then a rate of 16.9 percent.

Half of Britain’s population, or 30.8 million people, had a credit card in November, according to Apacs. The value of outstanding balances rose to 55.9 billion pounds ($83 billion) in September, the most in nine months.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net