Understanding credit

Every year millions of consumers in the UK enter into a credit agreement.

Most of these agreements are covered by the Consumer Credit Act and the numerous regulations and orders made under it.

New terminology and definitions have been introduced, some of which many of us may not understand. However, to help us now, every credit advertisement we see in our local newspaper or on television must now use "plain and intelligible language", be clearly legible and must specify the name of the advertiser and the full postal address.

• Credit licence: Under the Act anyone providing credit must hold a licence. These are issued by the Office of Fair Trading, who can also withdraw the licence if the holder has used unfair or illegal trading practices.

Licences are also required for other credit-related business, such as providing hire purchase or debt collecting. It is an offence for a trader to offer credit services without having a credit licence.

• Total charge for credit: This is the charge which is payable by you, the borrower. It includes the interest you will pay on the credit and any other charges payable under the agreement. It does not include the actual amount borrowed. So, if you borrow £1,000 and have to pay back £1,100, the total charge for credit is £100.

• Annual percentage rate (APR): The APR is calculated by taking into account the amount of credit advanced, the total charge for credit, the number of payments to be made and the period of time which the payments must be made. It is shown as a percentage, and is the easiest way to compare different credit products.

When an APR is quoted in a credit advertisement, there are now regulations which control the size and the position of where it is placed. The APR must, in certain circumstances, be more prominent in the advertisement than all other financial information.

• Credit Cards: These have become an increasingly popular way of paying for things. The UK has the largest credit card market in Europe, with one credit card for every two adults.

We can use a credit card to purchase goods immediately. A bill is then sent to us each month, showing the minimum payment to be made with interest being charged on the outstanding balance. If the full balance is paid each month then there is usually no interest to pay, depending upon the credit card company.

• Debit card: This is not a form of credit card, but is used to take money directly from your bank account in a similar way to writing a cheque.

• Store cards: Similar to credit cards, but can only be used in the store or the retail group specified on the card.

• Joint liability: If you purchase goods using your credit card, or the trader arranged the credit and the goods cost more than £100, then joint liability will apply.

This means if the goods are faulty or misdescribed in any way, you the consumer will have a claim against not only the seller, but also the lender. This is especially useful should the trader/retailer you have purchased the goods from have ceased trading.

There are new consumer credit regulations in the pipeline which aim to make credit terms more transparent.

The regulations will:

• Tighten up credit advertising so that consumers will be better able to compare products.

• Introduce a standard way of calculating the APR for credit cards.

• Mean that when APR appears in an advert, it will always have to be more prominent than all other financial information.

• Introduce a new signature box for consumers to sign if they are purchasing any additional insurance products, such as payment protection plans, on credit. This will work to highlight any additional costs.

Furthermore, the Disclosure of Information Regulations will require traders who provide credit to give us the customers information prior to the contract in a manner which does not form part of the credit agreement and which precedes it.

Anyone requiring further help or advise on a consumer credit agreement can phone the Consumer Direct Helpline on 08454 040506.

Their lines are open Monday to Friday, from 8am until 6.30pm, and from Saturday 9am to 1pm.

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