An interest rate that changes after a borrower has signed can transform the cost of credit, so both the Consumer Credit Act 1974 and the FCA’s rules limit how and why a lender may vary it. The Act requires written notice of a change, and the FCA’s Consumer Credit sourcebook requires a valid reason and, for credit and store cards, gives extra rights to leave. The rules apply across the UK to regulated consumer credit agreements.
Written notice under section 78A
Section 78A applies where the rate of interest charged under a regulated consumer credit agreement, other than an excluded agreement, is to be varied. The creditor must inform the debtor in writing before the variation can take effect. The notice must give the variation in the rate, the amount of any payments to be made after the variation if different (expressed as a sum of money where practicable), and any change in the number or frequency of payments. Agreements secured on land, and overdrafts arising where a current account holder overdraws without a pre-arranged overdraft, are excluded from this section, and the rules for overdrafts under an authorised arrangement apply only where the rate increases.
Exceptions for reference rates and periodic information
Section 78A(2) removes the duty to give advance notice in two cases. The first is where the agreement provides that the creditor will inform the debtor in writing periodically of the same matters after any variation. The second is where the agreement says the rate varies with a reference rate, that reference rate is publicly available, information about it is available at the creditor’s premises, and the variation results from a change to that reference rate. The borrower should therefore read the agreement to see which mechanism applies, and the guide to asking for a copy of a credit agreement explains how to obtain one.
The FCA’s valid reason rule
CONC 6.7.14R says that where a firm has a right to increase the interest rate under a regulated credit agreement, it must not do so unless there is a valid reason. CONC 6.7.15G gives examples of valid reasons: recovering the genuine increased costs of funding the credit, and a change in the risk the customer presents that justifies the change in the rate. The guidance adds that a change in risk would not generally include missing a single repayment or failing to repay in full on one or two occasions. Under CONC 6.7.16R, where the increase is based on a change in the risk presented by the customer, the firm must tell the customer that this is the reason and, if asked, provide a suitable explanation, which may be a generic one.
Credit cards and store cards: the 60-day right
CONC 6.7.13R adds protections for credit cards and store cards. Where a firm proposes to use a power under the agreement to increase the interest rate, it must give the customer sixty days from the date of its notice during which the customer may require the account to be closed. It must also allow the customer to pay off the outstanding balance at the rate that applied before the proposed increase, over a reasonable period, and it must tell the customer about both rights in the notice. A borrower who receives such a notice can therefore compare the new rate with the option of closing the account and repaying the existing balance at the old rate.
Other rules that interact with a rate increase
A higher rate can push a borrower towards trouble, so the FCA’s arrears and affordability rules remain relevant. A lender that increases rates on a borrower already in difficulty must still treat the borrower fairly under the rules described in the guide to falling behind on repayments, and the guidance on persistent debt in the guide to credit card persistent debt applies where balances are not falling.
If the rate rise looks wrong
A borrower who thinks the lender lacked a valid reason, or did not give proper notice, can raise the point with the lender and, if the response is unsatisfactory, complain to the Financial Ombudsman Service, as explained in the guide to complaining to the Financial Ombudsman Service. Where the terms of the agreement or the lender’s conduct are said to make the relationship unfair, a court can also consider the question, as explained in the guide to unfair relationships. Free help is available from debt advisers before any decision is made.
FAQs
Can a lender raise the rate without telling me?
Section 78A generally requires the creditor to inform the debtor in writing before a variation takes effect, subject to the exceptions in the section, including certain reference-rate arrangements.
Is one missed payment a valid reason for a higher rate?
CONC 6.7.15G says a change in risk that justifies a rate rise would not generally include missing a single repayment or failing to repay in full on one or two occasions.
Can I leave if my credit card rate is going up?
Under CONC 6.7.13R the firm must allow sixty days from its notice to close the account and must permit the balance to be paid off at the pre-increase rate over a reasonable period.
The bottom line
A lender that varies the interest rate on a regulated consumer credit agreement must generally give written notice under section 78A, must have a valid reason under CONC 6.7.14R, and, for credit and store cards, must allow sixty days to close the account and repay the balance at the old rate. Borrowers who think a rise was unjustified can complain to the lender and the Financial Ombudsman Service. This is general information, not legal advice.