The Consumer Credit Directive takes effect on 1 February 2011. The aim is to improve transparency so that it is easier for individuals to compare credit products and make a well-informed decision about whether or not the credit on offer suits their needs and financial circumstances.
So what’s changing and what exactly will it mean? We take a look…
What is the Consumer Credit Directive? (CCD)
The CCD was adopted by the European Council in May 2008 with the aim of establishing a harmonised set of rules within core areas of the credit market among EU member states.
Its implementation is designed to ensure that a high level of consumer protection applies across Europe and to help improve consumer confidence and understanding of credit products and assist individuals in making the right decision when it comes to taking out unsecured credit.
Unsecured credit refers to any lending product, such as a personal loan or credit card, where the lender does not have a charge on an asset belonging to the borrower in case he or she defaults on repayments. The most common asset used for security in this way is a borrower’s house – the lender could potentially repossess the property if the borrower falls behind in their repayments. Secured lending products aren’t covered by the CCD.
From 1 February 2011, providers offering any form of unsecured credit will have to adhere to the new rules, although some started implementing the changes earlier.
What does the CCD mean for me?
Lenders and companies, such as moneysupermarket.com, which introduce individuals to an unsecured credit product, have been preparing for the introduction of the CCD for some time and most of the changes won’t necessarily be obvious or evident to individuals.
However, there are a number of things which will be different. Here, we outline some of the main changes.
Changes to the advertised APR
Most of us will be used to seeing the ‘typical’ APR advertised when we are looking for a credit card or personal loan. This is the rate that at least 66%, or two-thirds, of customers must be offered. While rates will vary depending on your individual circumstances and credit history, the typical APR is therefore the rate offered to the majority of borrowers.
From February 1, however, loan and credit card providers will no longer refer to the typical APR, but instead to the ‘representative’ APR. This rate only has to be offered to 51% of customers, so fewer people applying for a credit card or loan will actually get the rate they see advertised.
Secured lending such as mortgages and secured Loans will continue to use typical APR. There will also be no change to the equivalent annual rate (EAR) used to display overdraft costs.
Clearer examples of what borrowing will cost
Wherever a rate is published, it must be accompanied by a ‘representative example’. This must show the amount of credit, the borrowing rate, any charges That are included in the total charge for credit, the representative APR and, in the case of credit in the form of a deferred payment for specific goods, services, land or other things, the cash price and details of any advance payment.
If it is a personal loan you are taking out, then the representative example must also show the duration of the agreement, the total amount payable and the amount of the instalments, but this particular information is optional for credit cards.
So, a representative example for a personal loan might read like this:
“Representative example: Borrow £7,500 over 3 years at a Representative APR of 7.9% and an arrangement fee of £65, you’ll pay £234.91 a month giving a total repayment of £8,521.76 and an interest rate of 7.4% p.a.”
And for a credit card, a representative example might look like this:
“Representative example: If you spend £1200 at a annual interest rate variable of 8.2% and an annual fee of £150 your representative APR is 8.9%.”
Information before you sign up – and after
You have to be given all the information about the credit agreement you are considering in good time, so that if you want to, you can take it away and shop around to make sure you are getting a good deal.
There is also a new right for consumers to request a statement of account for a fixed-term loan. This statement can be requested at any time, but not more frequently than once a month.
Lenders are also obliged to notify borrowers in writing of any changes in interest rates before the change takes effect.
Cooling off period and early repayments
You can withdraw from a credit card or loan agreement within 14 days of signing up to it. You must, however, repay the credit and pay interest for each day the credit was drawn down.
Once you have signed up to an agreement and are happy with it, you can make partial early payments to clear your debt at any time.
However, there may be a charge for doing this, although it cannot exceed 1% or 0.5% of the amount repaid early.
Increase in protection
Under current rules, when you make a credit card purchase between £100 and £30,000, the lender and the supplier are jointly liable when it comes to making sure you are provided with the goods or service you paid for. When the CCD comes into effect, you will also be protected for transactions between £30,000 and £60,260 if you have paid for them using a credit card.
If your application for credit is rejected
If your application for credit has been rejected due to information that the lender received from a credit reference agency, the lender is obliged to inform you of this. They must also tell you which credit reference agency supplied them with the information and provide you with contact details.
It is always worth getting hold of a copy of you credit report before taking out a credit card or loan, so that you can identify anything which could cause a lender to reject your application.