The Consumer Credit Act explained

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The Consumer Credit Act 1974 regulates credit card purchases and personal loans in the UK. The regulations also give you the right to change your mind within a 14-day cooling-off period. In this guide, we’ll take a closer look at what’s covered by the Act and when you can make a claim, so that you understand your rights as a borrower.

The Consumer Credit Act (CCA) 1974, sometimes referred to as the credit protection act, is a piece of UK legislation that governs how lending works. The Act brought significant changes to consumer credit laws.

The regulation sets clear rules for:

• How businesses can lend money

• How they can collect payments

• Your rights as a borrower

Consumer credit, also called consumer debt, is essentially any money borrowed to buy goods or services. It typically refers to unsecured loans for smaller amounts, such as credit card debt or personal loans. A common example is a car loan, which you would take out to increase the amount of money you can spend.

A loan is likely to be classed as consumer credit under the Consumer Credit Act if it is repayable in monthly instalments with added interest, and there is no asset acting as collateral if the loan isn’t paid. A mortgage, for example, would not be considered consumer credit.

Prior to the Consumer Credit Act of 1974, consumer credit legislation was fairly patchy and focused on a few limited areas. There was little protection for consumers and small businesses in the UK that relied on credit for purchases. This ultimately led to the Consumer Credit Act being passed into law in 1974. It was then amended in 2006. Consumers now have recourse to the law if they are treated unfairly, while the whole lending environment has become more transparent.

The Consumer Credit Act protects most everyday credit-based borrowing. To find out whether your particular credit is covered, you can check the first page of your consumer credit agreement. 

The following are typically covered by the Act:

• Credit cards and store cards

• Personal loans, including payday loans

• Hire purchase agreements

• Store finance deals and ‘buy now, pay later’ agreements

• Catalogues

The following are not covered by the Act:

• Mortgages (these are regulated by the Financial Conduct Authority)

• Loans from friends or family

• Household bills such as gas, electricity, or water

• Council tax, benefit overpayments, and other government debts

• Loans from unlicensed lenders (loan sharks)

• Purchases made with debit cards. Instead, most banks typically offer the chargeback scheme, where consumers can dispute transactions and claim a refund if they are unhappy with their purchase.

The 2006 Consumer Credit Act was essentially an update to the 1974 legislation, reflecting changing consumer habits. It brought in a few key changes:

• Consumers can take complaints to the Financial Ombudsman Service if they’re dissatisfied with how their lender handles disputes.

• Agreements over £25,000 are now included, reflecting the rise in consumer debt. 

• It now includes small businesses with fewer than three people.

• The Office of Fair Trading (OFT) has more authority, allowing them to investigate firms applying for credit licences.

If you have entered into a Consumer Credit Act agreement, you have more rights, including:

• If you fall behind on payments, creditors must send you a default notice and give you time to catch up before taking any further steps.

• Lenders are also required to send you regular statements about your account. If you’re in arrears, they must inform you.

• All lenders who are regulated must have a valid licence.

• There are limits on the type of court action some creditors can take against you.

• You can make a claim for a credit card refund under the Act.

Section 75 of the Consumer Credit Act gives you extra protections when you make a purchase with your credit card. Your credit card provider is jointly responsible to refund you for the entire amount if something goes wrong. Perhaps the retailer you purchased the goods from becomes insolvent and stops trading before you receive them. It could also apply if you’ve tried contacting the retailer but they don’t respond.

The following conditions must apply:

• The goods or services cost between £100 and £30,000.

• You paid with a credit card, a point-of-sale loan, or certain catalogue accounts.

• There’s been a breach of contract or misrepresentation of the goods or services by the supplier.

Section 75 doesn’t apply if:

• You paid with a debit card, cash, or a bank transfer.

• The credit was part of an overdraft.

If you’re eligible, you can make a claim against your bank or lender. They’ll review whether the supplier has broken the agreement, and your bank should help with the process. If you’re not happy with how they handle it, you can file a complaint.

Here is an example: 

You bought a £500 sofa using your credit card, but the firm went into administration before it was delivered. Because the purchase was over £100 and you used a credit card, you could make a Section 75 claim for the full £500, even if you only paid part of it on your card.

If you received the sofa but discovered it had something wrong with it, you could first approach the retailer for a refund. But if they have gone out of business by the time you get around to contacting them, you would be able to make a claim under the Consumer Credit Act.

The Consumer Credit Act covers your rights when it comes to credit agreements. But what is a consumer credit agreement? This is a legally binding contract between you, the borrower, and the lender that outlines the loan’s terms. It must state how much you borrow, how you’ll repay it, the Annual Percentage Rate (APR), and any other fees. Creditors must also inform you about your cancellation rights when you sign the agreement. Both you and the lender must agree to these terms before finalising the deal.

Under Section 66A of the Consumer Credit Act, consumers have a certain amount of time to pull out of a credit agreement. Perhaps you find a loan with a better interest rate elsewhere, or you simply change your mind. Either way, you’re not required to give a reason.

Typically, you have 14 days from signing the agreement (or receiving a copy of it) to change your mind. For credit cards, this 14-day period starts when you receive details of your credit limit. This is known as the ‘cooling-off’ period, and it applies whether you signed the agreement in person, over the phone, by post, or online. Some firms may offer longer periods, so it’s worth checking the terms of your specific agreement.

There are some situations where this right to withdraw doesn’t apply:

• The credit is over £60,260

• The agreement is secured on land

• It’s a restricted agreement or bridging loan for land purchase

To cancel, you can let the lender know in writing, but your consumer credit agreement will tell you exactly how to proceed. If you’ve already borrowed any money, you’ll need to pay it back, along with any interest accrued, and the lender must give you 30 days to do so. If you’re cancelling a hire purchase agreement for a car, for example, you’ll still need to pay the vendor directly or return the goods.

Under the Consumer Credit Act, you can pay off all or part of your loan early and you won’t have to pay the full amount of interest originally agreed upon. This can be particularly useful if more than 14 days have passed since you signed the agreement (meaning the cooling-off period doesn’t apply). The advantage is that, once you’ve cleared your credit card debt, for example, you’ll have extra money each month to save or pay off other debts.

Under the consumer credit legislation, lenders are required to reduce the interest through what’s known as a statutory rebate, which they calculate themselves.

The following steps show how a consumer can settle a loan early:

1. Write to your lender asking for the exact amount you’d need to pay. This is called an early settlement figure. 

2. The lender must provide this within seven days of your request. 

3. Once you have the figure, you’ll have 28 days to decide whether to proceed. 

4. If you change your mind, you can continue with your regular payments.

5. If you want to pay off only some of the loan, you can ask the lender how this will affect your remaining balance and monthly payments. Depending on the terms, you might shorten the repayment period or reduce future payments.

6. If your lender doesn’t respond or charges you more than expected, you can take it to the Financial Ombudsman Service.

Your credit score may be affected if your credit application is declined, but you don’t have to be left in the dark about the reasons why. The Consumer Credit Act gives you the right to request details from the lender about which credit reference agency they used to assess your credit file. You must make this request in writing within 28 days of being turned down. 

If you have been declined, it can be helpful to review your credit report to understand what may have influenced the lender’s decision. Any inaccurate information can be corrected to improve your credit score.

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