Credit card firms must do more for struggling customers
Credit card customers who have persistent debt should be given more support by their provider, according to the financial regulator.
The Financial Conduct Authority (FCA) says it has “significant concerns” about the scale and nature of credit card debt in the UK. Customers with persistent debt end up repaying about £2.50 for each £1 borrowed.
It wants those who are in significant debt for a long period to be given greater assistance by card companies.
Under these proposals, firms will be required to take positive action with the customer, such as agreeing to a repayment plan or suspending cards to prevent future spending. For the customers most seriously in debt, firms would have to reduce, waive or cancel charges and interest.
Consumers are said to have “persistent debt” when they have paid more in interest and charges than they have repaid borrowing over an 18 month period.
The FCA says these are among some of the most profitable customers for card companies, and that providers often do little to support them.
Around 3.3 million people have persistent credit card debts, of which 1.8 million have struggled for a period of three years or more.
Credit card firms can now respond to the FCA’s proposals before its final policy statement is released later in the year.
‘These proposals don’t go far enough’
Andrew Bailey, FCA chief executive, says: “Credit cards can be a very effective product for consumers, but a significant minority of customers experience real difficulties. We expect our proposals to reduce the number of customers in problem credit card debt, as well as putting customers in greater control of their borrowing.
“Because these customers remain profitable, firms have few incentives to intervene. We want to change this situation so that firms and customers will deal with outstanding debt more quickly, and avoid persistent debt in the first place.”
However, Mike O’Connor, chief executive of StepChange Debt Charity, doesn’t believe the proposals address how credit cards trap people into debt in the first place. He adds: “The FCA needs to ensure that consumers are properly protected and our concern is that these proposals don’t go far enough. Credit card debts remain the biggest single category of problem debt for our clients, with average debts of over £8,000.
“We welcome moves to tackle persistent debt, but we are concerned that these proposals will not fix the central issue that credit cards, which are supposed to be a short-term form of borrowing, often become long-term and expensive debt.
“The proposals do not address the fundamental question of how credit cards trap people in persistent debt. These measures will still potentially leave people paying back substantial amounts over extended periods of time.”
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.