Under a new agreement made with the government credit card companies will now not be able to increase interest rates without giving borrowers sufficient notice and will only be able to up rates twice in one year.

The newly-agreed “fair principles”, which will come into force on 1 January, will see consumers struggling with repayments benefit from some ‘breathing space’.

The previous system saw borrowers facing sudden increases of over 10% in some cases, which only added to the problems of those already finding it hard to keep up with repayments.

Under the principles announced today:

Credit card firms will not be allowed to increase interest rates on credit or store cards for at least 12 months after a new borrower has signed up to a deal

After this initial 12 month period, providers will only be allowed to increase rates every six months, but must give borrowers 30 days’ notice

If a borrower is told of a rate increase, they must be given a chance to ‘cancel’ their card and repay their outstanding balance at their existing lower interest rate

To increase transparency for consumers the fair principles state: “If the customer asks, we will ensure that our staff are able to provide the customer with an explanation as to why an interest rate may have been increased.”

Those falling behind with repayments will also receive extra support – card companies will not increase rates for those customers that have failed to make repayments for two months or longer or have asked a debt advice agency for help

There has been no cap on the amount lenders can increase their interest rates

Card providers have not been instructed to reduce interest rates
Gareth Thomas, consumer affairs minister, welcomed the fair principles.

“I recognise that these changes will not be without financial pain for credit card companies, but it was vital that we nipped in the bud the bad practices that were causing real hardship for borrowers,” he said after a meeting with lenders yesterday.

“These commitments will help families manage their finances and cope with repaying debts,” he added.

Sandra Quinn, spokeswoman for the card issuers’ body Apacs, said that the changes would help struggling borrowers, “but ideally we’d like to help ensure customers don’t get to this point”.

“If you do borrow on a credit card or plan to at this time of year – as so many of us do – make sure you know how you plan to repay it.

“Credit cards offer great flexibility for borrowing in the short term, but can be expensive if you borrow over a longer period,” she added.