FCA failing poorer households from high-interest credit card debt

Almost half of the poorest households are using their credit cards to pay for food or other living costs or to deal with unplanned emergencies and many are still paying more than £2 for every £1 borrowed despite recent rule changes from the regulator.

The report, from a coalition of organisations, focuses on credit card debt, which has been growing alarmingly in recent years. Total consumer credit debt now stands at £217 billion — the highest level on record and greater than prior to the Finance Crisis of 2008. Around one-third of this amount is owed on credit cards.

The report presents new evidence on the impact of credit card debt on low income households. It warns that measures introduced by the Financial Conduct Authority (FCA) in 2018, which were aimed at curbing ​‘persistent credit card debt,’ are failing to adequately protect consumers from high interest costs and calls for a cap on the total cost of charges that borrowers pay.

The report also points out failures in the FCA’s previous review of the credit card market , Despite having conducted a two-year study of the credit card market between 2014 and 2016, the FCA did not gather analysis of the uses of credit cards by income group. It calls for a cap on the costs of credit card similar to that applied to payday lenders in 2015, and for an immediate inquiry into the measures the FCA introduced after its credit card review.

Andrew Pendleton, Director of Policy at the New Economics Foundation, one of the Coalition groups, said “With incomes squeezed and costs rising and with the fiasco of Universal Credit, many of the poorest households in the country are turning to their credit cards to make ends meet, but then sinking deeper into the debt trap. It’s a growing crisis and it’s shocking that the FCA does not have a handle on it.”

Damon Gibbons from the Centre for Responsible Credit (CFRC), who conducted the research on behalf of the coalition, said “It is outrageous that people using credit cards can still pay more in interest and fees than they would if they borrowed from a payday lender. This continues despite the FCA’s recent rule changes, which are inadequate to address problems in this market. Despite having the power to introduce a cap on the cost of credit card debt the FCA has conducted no detailed assessment of this option. Just as it did with payday lending, Parliament should now intervene and force the FCA to impose a cap.”

Using the Bank of England’s 2018 Household Survey, the Centre for Responsible Credit’s research concludes:

• Almost half of those spending more than one-quarter of their income on debt repayments — the threshold for what is considered ​‘severe’ debt — earn less than £15,000.
• One-third of all credit card borrowers have a balance that they cannot clear at the end of the month.
• 18% are incurring debts on their credit cards to pay for food or other living costs and 12% to meet an unplanned emergency expense such as car repairs.
• The percentage of people using their cards for these purposes increases to 40% among those living in households with pre-tax incomes of less than £15,000.
• A further 20% of low-income credit card borrowers used their credit card to refinance existing credit card borrowing or to pay off other types of debt.
• The credit card debts of these low-income borrowers averaged £2,900; 68 percent of their total consumer credit debt of £4,250.
• These borrowers have an average total debt to income ratio of 50 percent, and their average credit card debt to income ratio is 34%

The report calls for a cap on the costs of credit card costs similar to that applied to payday lenders in 2015, and for an immediate inquiry into the measures the FCA introduced after its credit card review.