Interest-free deals ‘trap millions in spiral of debt’

The credit card industry was thrust back in the dock yesterday after the City watchdog announced details of a study into the £150bn market.

The Financial Conduct Authority is concerned that credit cards are being marketed too aggressively, pushing consumers to run up debts they can’t afford to repay.

It pointed out that there are about 30 million cardholders who have £56.9bn of outstanding debt, although with many people holding two to three cards, the debt is spread among many fewer people.

Meanwhile, UK consumers hold about 70 per cent of all credit cards in Europe.

Christopher Woolard, director of policy, risk and research at the FCA, said: “We want to make sure that the market works well for all consumers and that card-holders get a fair deal.”

Its research published in April revealed that the credit card market was not working well for some consumers with many “worn down by continual marketing”.

The study, which runs until January, will examine how easy it is to shop around and understand terms and conditions.

It will also investigate whether certain groups are disadvantaged or over-borrowing and whether consumers can easily switch between different card providers.

Mr Woolard said: “We want to understand in more depth what drives consumers to make the choices they do and how firms develop the services they offer.”

The market has moved towards attracting borrowers in with long-term 0 per cent deals. Now you can get almost three years’ worth of interest-free credit. But research by the University of Bristol’s Personal Finance Research Centre showed that interest-free deals can lure some people into spending more than they can afford. And that quickly leads to people being trapped in a spiral of debt.

Borrowing on plastic – especially as many people use several cards – can rapidly escalate to a sizable amount.

In fact, the average total credit card debt of clients of the StepChange Debt Charity is £9,047, it said. The average person who turns to the charity has multiple plastic, with 2.7 cards.

Mike O’Connor, the charity’s chief executive, said: “Too many people are using credit as a safety net when all too often it is a trap which leads to problem debt. Credit card debt is one of the most common debt problems we see.”

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said: “The FCA is absolutely right to be looking at all sectors of the credit market. Credit card borrowing remains a hugely significant part of the debt landscape.”

Richard Koch, head of policy at The UK Cards Association, said: “The industry has a long-standing commitment to responsible lending, and over the last five years has introduced many changes – including credit limits and re-pricing of debt, improved transparency, and forbearance for those who find themselves missing repayments.”