Watchdog warning on borrowers trapped in long-term credit card debt

3rd November 2015


The City watchdog has sounded the alarm over the debt levels of credit card customers in a new market study.

The Financial Conduct Authority has also called for better information to be provided to those shopping around.

It found that credit card competition is working fairly well, but it is concerned about customers in long-term debt  who are just above default levels, and the incentives for firms to manage this.

It says that consumers in default are extremely unprofitable and firms are active in contacting consumers who miss payments, triggering forbearance at this point.

However, consumers with persistent levels of debt or who make minimum payments are profitable, firms therefore have fewer incentives to help these customers.

The FCA found that around 6.9% of cardholders (about two million people) are in arrears or have defaulted. They estimate a further two million people have persistent levels of debt that some may be struggling to repay, and that a further 1.6 million people are repeatedly making minimum payments on their credit card debt.

The FCA’s interim findings also show:

▪ Firms compete strongly for custom on some features, offer a range of products to meet consumers’ needs and there have been new entrants in the market in recent years.

▪ Consumers shop around, switch and value the flexibility offered by credit cards.

▪ The FCA found that firms were not targeting particular groups of consumers to cross-subsidise other groups.

The FCA has identified a range of potential remedies to make the market work better for consumers.

In relation to shopping around and switching, this includes:

▪ Measures to help consumers find the best deal include enabling better access by consumers to their transaction data, boosting the role of comparison sites; and

▪ Ensuring consumers can search the market without damaging their credit score, and prompting consumers when they are nearing the end of a promotional period.

To reduce problematic credit card debt, this includes:

▪ Measures to give consumers more control over credit limits and use.

▪ Measures to encourage consumers to pay off debt quicker when they can afford to.

▪ Firms do more to identify earlier those consumers who may be struggling to repay and take action to help them manage their repayments.

Christopher Woolard, director of strategy and competition at the FCA, says: “This is a really important market in the UK. Around 60% of adults have at least one credit card, and there is an estimated £61 billion in outstanding balances.

“Our study suggests that the market is working reasonably well for most consumers, with a range of cards on offer. However, for a significant minority who are in persistent levels of debt, the market could potentially work better.”

A debt charity’s view:

Mike O’Connor, chief executive of StepChange Debt Charity, says: “We see too many credit users falling into financial difficulty and more is needed to ensure that what should be a short term product does not push people into unaffordable long term debt.

“Credit card debt is the single biggest type of problem debt we see; two thirds of our clients have at least one card and their average debt is more than £8,000. Last year, 14 million people suffered a shock to their income or a change in circumstances and 4.5m of them used credit to cope. People who use credit to cope are 20 times more likely to fall into problem debt than those who don’t.

“The FCA’s focus on credit limits and minimum repayments is vital as they are both a significant part of the problem. We will work with the FCA to develop measures to support people in making sustainable payments. Continually paying the minimum can take more than 10 years to clear the balance and is often a sign of financial difficulty.

“We also want to see action on the issue of multiple credit cards, which is not addressed in the report. A quarter of our clients have three or more cards and their average credit card debt is nearly £20,000. Action is required on how credit card companies share data and carry out affordability checks to ensure people do not take on credit that looks cheap but will ultimately become unmanageable.

“We welcome industry progress on forbearance and look forward to working with them on raising standards further. Ultimately, we want to see the Government introduce an extended ‘breathing space’ guarantee, where interest, charges and enforcement are frozen to allow people to get back on their feet quickly before their debt becomes unmanageable.

“Whilst it is important that the market works hard for consumers and offers competitive deals, it is vital that it works just as hard to protect them from financial difficulty. The FCA, the credit card industry and consumer groups now need to work together so people in difficulty can get the help they need. As providers begin to lend more freely, we must avoid returning to the high levels of unsustainable credit we saw in the run-up to the recession.”


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