How the new credit card rules affect you

Yesterday was a good day for consumers. In one small way, their financial world got better.

After months of wrangling, the government finally announced a new set of guidelines to tackle the unfair practices credit card companies use to take our money.

And here's the amazing thing: I'm actually impressed. I was expecting something pretty wishy-washy. Instead, these changes will actually make a difference.

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The credit card companies can't wriggle out of complying either. It may be called a voluntary code, but the Financial Ombudsman has the power to force firms to pay compensation if they don't comply, so effectively these guidelines are rules.

Fantastic news for borrowers

The best part of the new rules will be the change to how payments are allocated. At present, any repayment you make on a credit card debt pays off the bit of the balance with the smallest interest rate first.

Say you have £200 in debt that is on an interest rate of 0% (perhaps it was a balance transfer). Then you buy an £80 dress on the card.This £80 will then accrue interest at the card's standard rate. Then when you make a repayment, it goes towards the balance transfer amount, and the £80 sits on your card accruing interest until the other £200 has been paid off.

But, under the new rules this will have to be reversed, and repayments will pay off the balance earning the most interest first. So using the example above, you'd pay off the £80 dress before the £200 balance transfer.

This is great news for anyone who doesn't pay off their balance in full every month, as they will no longer need to worry about their interest payments multiplying their expensive debt, while they pay down their cheap debt.

All that said of course, the best cards to go for are cards that offer 0% deals on both balance transfers and purchases.

The best of the bunch is Virgin who have combined with MoneySupermarket.com to offer a card with 0% on balance transfers and purchases for 12 months. But act quickly as the offer ends on Thursday (18 March).

Have more control over your credit

The other good news to come out of the new credit card rules is that you can now have a lot more control over your credit limit and interest rate.

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You can now tell your credit card provider that you never want them to increase your credit limit. In the past, they could increase it as and when they liked a great way of getting people to spend more than they could afford.

You will also be able to reduce your credit limit whenever you like, either online or through an automated telephone system. You wouldn't think that reducing your credit limit would ever be a problem, but it is.

Card companies like you to borrow as much money as possible the more you borrow, the more they make. Only last week I made a request to have my credit limit reduced and was rejected!

Say no to interest rate rises

The government has also acted to curtail credit card firms' ability to increase the interest rates on existing debt. At present, when a firm decides to increase their rate, you have 30 days to reject the rate and close the account, and you can pay off any existing debt at the old interest rate. Under the new rules, you will have 60 days to reject an interest rate rise.

Your credit card provider will also have to send you a letter telling you how much your debt will cost you at the higher rate, so you can make an informed decision about the rise.

Minimum payments are on the rise

In an effort to help people pay off their credit card more quickly, there are also new rules on minimum payments the amount you must pay off your credit card each month.

The minimum payment on new credit card deals will have to cover at least that month's interest, fees, charges and 1% of the amount that has been borrowed.

But, this does all mean credit cards could be about to get more expensive. All these changes are going to cost the companies money around £533m in the first two years, according to some estimates. And they are going to want to get that money back. So don't be surprised if some of the more attractive 0% deals disappear, or if you suddenly find yourself paying annual fees just to have your card.

But, at least the government has finally sided with consumers against the profiteering of these firms. Now let's hope Gordon Brown decides to tackle a few more consumer issues, before election day rolls round.

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