Credit card firms ‘must do more to help those struggling with debt’

FCA calls for measures to give consumers more control over credit limits and utilisation and to encourage consumers to pay off debt quicker when they can afford to

Millions of borrowers who make minimum payments on credit cards are so profitable for credit card companies that they are disinclined to help them, a damning report from the Financial Conduct Authority (FCA) has revealed.

The report said that there were few incentives for firms to intervene with struggling customers who are most at-risk of falling into a desperate debt cycle.

“For a significant minority who are in persistent levels of debt, the market could potentially work better,” said Christopher Woolard, director of strategy and competition at the FCA.

Around 60 per cent of adults have at least one credit card, and there is an estimated £61bn in outstanding balances. Two million credit card-holders are currently in arrears or have defaulted, according to the City watchdog, and these customers are extremely unprofitable, which triggers firms to take action.

But lenders don’t reach out to the profitable 2 million people who are in persistent levels of debt or the further 1.6 million who only make the minimum payments on their debt each month.

According to the StepChange debt charity, credit card debt is the single biggest type of problem debt. Two thirds of the charity’s clients have at least one card and their average debt is more than £8,000. It reports that 14 million people suffered a shock to their income or a change in circumstances last year and 4.5 million 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,” said Mike O’Connor, StepChange’s chief executive.

“We see too many credit users falling into financial difficulty and more help is needed to ensure that what should be a short-term product does not push people into unaffordable long-term debt.”

In its interim report into the market, the FCA has called for measures to give consumers more control over credit limits and utilisation and to encourage consumers to pay off debt quicker when they can afford to.

It has also asked firms to do more to identify consumers who may be struggling to repay earlier and take action to help them manage their repayments. Its final report on credit card debt will be published in spring 2016.

Martin Lewis of MoneySavingExpert said it was time for more flexible repayment structures to become standard. “Minimum repayments are dangerous – as they are based on a percentage of what is owed – and only just service the interest each month,” he said. “This locks people into repaying interest for years; and many who do this can’t shift to cheaper deals, meaning costs snowball.”

In defence of the credit card companies, Richard Koch, head of policy at The UK Cards Association, said: “Over the last few years the credit card industry has introduced a number of changes to increase the support for customers who are struggling.”