Are you one of the 4 million Brits struggling with credit card debt? You are certainly not alone. Research from the New Economics Foundation found that credit card debt is as unmanageable as payday loan debt used to be before FCA regulations. Explore the ins and outs of UK credit card debt and what’s being done to fight it with Payday Loans Net.
- Why introduce measures to protect credit card holders?
- The FCA’s latest regulations to combat problem debt on credit cards
- Criticisms of the FCA’s actions
- Spotlight on predatory credit card providers
- Whether a credit card ban is possible
Why Introduce Measures to Protect Credit Card Holders?
Credit cards are a form of high-cost credit readily available to consumers. Like a wage day advance, credit cards can easily tempt users to spend far more than they can afford to repay. Credit cards, however, are becoming an increasing concern as UK consumers amass alarming amounts of credit card debt. The FCA calculates that Britons with persistent card debt pay more in interest than they ever borrowed with the card. On average, these consumers pay £2.50 in fees for every £1 that they spend on their card.
Of course, credit card providers cater directly to these consumers, and not much was being done to protect the vulnerable. In response, the FCA drew up new rules to regulate credit card companies.
What are the FCA’s Latest Regulations to Combat Credit Card Debt?
These new rules have the potential to save vulnerable credit card users between £310 million and £1.3 billion per year. The new regulations aim to break the cycle of persistent debt, and include the following guidlines:
- Credit card providers would contact their customers in debt for more than 18 months, explain the advantages of making more than minimum payments and refer them for debt advice.
- If their behaviour doesn’t change, companies would contact them again after 27 months to remind them of their advice, warning that they may restrict further spending on the card.
- Card providers would offer customers a way to repay their outstanding balance over a reasonable period (of 3-4 years) by transferring them to a personal loan with fixed payments.
- Furthermore, companies would show forbearance by reducing, waiving or cancelling all fees in this period.
The FCA expects these warnings to make a big impact on UK consumer debt. They estimate that about half of the 4 million Britons stuck in credit card debt will make faster repayments. This will lead them to pay off their outstanding balance in 36 months. Furthermore, they predict that an additional 1.4 million will significantly reduce their debts in that time.
Criticisms of the FCA’s Measures
Several consumer protection groups feel that the FCA could have done more to battle over-the-top credit card debt. Considering the success of price caps in the payday loan industry, they hoped for similar measures with credit card companies. However, the FCA disappointed them in this respect. The FCA stated they could not implement price caps for revolving credit facilities such as credit cards. Unlike payday loans, credit cards don’t have a fixed sum or specific loan term, so it would be impossible to implement.
Although the StepChange debt charity approved of the new rules, they pointed out that there weren’t effective measures to prevent new customers from building up long-term debts. Furthermore, they singled out the issue of automatic credit limit increases, which encourage overspending and lead to poor credit scores. Although consumers can opt out of increased spending limits, often they don’t see a reason to decline. They felt it would be preferable to have customers consciously decide to opt-in for credit increases.
Spotlight on Predatory Credit Card Providers
In her call for a further crackdown on credit card debt, Labour MP Stella Creasy singled out credit card providers Aqua and Vanquis for targeting vulnerable consumers. Both firms specialise in providing credit cards for consumers rejected by mainstream card providers because they represent a high risk. This status comes from a poor credit score – either because of little credit history or from poor financial decision-making. Many take out these credit cards in an attempt to improve their credit rating.
They criticised these firms for charging an annual interest rate of 60%. According to the Bank of England’s research, this is triple the product’s average quoted rate.
Additionally, these companies offered a higher credit limit to some customers within just five months. Debt advisory groups believed that this tempted people who had little or a poor record of making sensible borrowing decisions. A report by the FCA in July 2016 discovered that a quarter of consumers who take out such cards are in serious arrears within only a year.
Is a Credit Card Ban a Possible Solution?
The FCA has commented that there are 30 million credit card holders in the UK, the majority of whom use their cards wisely. They enjoy the flexibility of paying by card, the reward programs, and the added protection it offers them. As a result, a ban isn’t likely as it wouldn’t be in the best interests of the majority.
Combatting Credit Card Debt: In Conclusion
Persistent credit card debt is just one facet of overall consumer debt in the UK, which affects 8.3 million Britons in total (according to the Money Advisory Service). Banning credit cards wouldn’t tackle the underlying reasons why people use them so unwisely. Some reasons why people resort to credit cards include wage growth disproportionate to inflation, erratic payments because of the gig economy and cuts in state help. Additionally, educating consumers about making smart financial choices is equally important. Budgeting is just one of the financial skills that children need to learn from an early age so they can avoid borrowing short term credit later in life.