Regulator failing poorer households over credit card debt

The Financial Conduct Authority (FCA) is failing to protect consumers from high interest rates on credit cards, according to a new report from the Centre for Responsible Credit, Jubilee Debt Campaign, New Economics Foundation and Research for Action as part of the End the Debt Trap Coalition.

The report has called for a cap on the total cost of charges that borrowers pay, as almost half of the poorest households are using their credit cards to pay for food or other living costs and to handle unplanned emergencies. The report revealed that many consumers are paying more than £2 for every £1 borrowed, despite recent rule changed from the regulator.

Total consumer credit currently sits at £217bn, the highest level on record and greater than the figure recorded just before 2008’s financial crisis, with around one-third of this being credit card debt.

The report presented new evidence on the impact of credit card debt on low income households and warned that measures introduced by the FCA in 2018, which were designed to curb “persistent credit card debt”, are failing to adequately protect consumers from high interest costs and calls for a cap on the total cost of charges that borrowers pay.

The report revealed that one-third of all credit card borrowers have a balance that they cannot clear at the end of each month. Almost half of those spending more than one-quarter of their income on debt repayments — the threshold for what is considered ‘severe’ debt — earn less than £15,000, and the credit card debts of these low-income borrowers averaged £2,900; 68 percent of their total consumer credit debt of £4,250.

Furthermore, the report highlighted failures in the regulator’s previous review of the credit card market. Despite having conducted a two-year study of the credit card market between 2014 and 2016, the FCA did not gather analysis of the uses of credit cards by income group. As a result, it called for a cap on the costs of credit cards, similar to that applied to payday lenders in 2015, and for an immediate inquiry into the measures the FCA introduced after its credit card review.

Commenting on the findings, New Economics Foundation director of policy Andrew Pendleton said: “With incomes squeezed and costs rising and with the fiasco of Universal Credit, many of the poorest households in the country are turning to their credit cards to make ends meet, but then sinking deeper into the debt trap. It’s a growing crisis and it’s shocking that the FCA does not have a handle on it.”

Damon Gibbons of the Centre for Responsible Credit (CFRC), who conducted the research on behalf of the coalition, added: “It is outrageous that people using credit cards can still pay more in interest and fees than they would if they borrowed from a payday lender. This continues despite the FCA’s recent rule changes, which are inadequate to address problems in this market. Despite having the power to introduce a cap on the cost of credit card debt the FCA has conducted no detailed assessment of this option.

“Just as it did with payday lending, Parliament should now intervene and force the FCA to impose a cap.”

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