Finance

Three million have card debts they cannot repay: Banks are accused of exploiting customers as watchdog announces tough measures to tackle the crisis

Banks were accused last night of exploiting millions of customers unable to pay off their credit cards.

The City watchdog said lenders had ‘little incentive’ to help customers who fork out £2.50 in interest for every £1 repaid.

In a hard-hitting report, it warned that 3.3million people were trapped by debts they might never be able to clear. Outlining tough measures to tackle the crisis, the Financial Conduct Authority said:

  • Customers who fail to reduce debts could have interest charges reduced, waived or cancelled;
  • Banks should block ‘persistent debtors’ from further spending;
  • The measures would cost banks up to £13billion in lost profits;
  • More than five million cards could take more than a decade to pay off.

Banks were accused last night of exploiting millions of customers unable to pay off their credit cards

Andrew Bailey, chief executive of the FCA, said yesterday: ‘Credit cards can be a very effective product for consumers, but a significant minority experience real difficulties.

‘We expect our proposals to reduce the number in problem credit card debt, as well as putting customers in greater control of their borrowing.

‘Persistent debt can be very expensive – costing customers on average around £2.50 for every £1 repaid – and can obscure underlying financial problems.

‘Because these customers remain profitable, firms have few incentives to intervene.

‘We want to change this situation so that firms and customers will deal with outstanding debt more quickly, and avoid persistent debt in the first place.’

The watchdog’s dramatic intervention came after figures published by the Bank of England last week showed credit card debt rising at the fastest rate for 11 years amid a dangerous borrowing binge.

Shoppers put another £562million on plastic last month, or £20million a day. Families now owe a record £67.3billion on cards – £2,500 a household.

The Bank of England, which has been widely blamed for fuelling the borrowing binge with low interest rates, last week unveiled a major review of lending practices and warned that the scramble to borrow ever greater amounts of money was now a major risk to stability.

At the weekend the Mail also revealed that lenders have dramatically relaxed their lending criteria and are offering credit cards with little or no income.

The FCA’s proposals will now be discussed with banks and consumer groups. The measures are designed to help 3.3million people in persistent debt on their credit card.

Dubbed ‘survival borrowers’, all pay more in interest and charges than they repay in capital over 18 months.

  • Customers can make repayments of as little as 1 per cent of the balance plus monthly interest – or £5, whichever is higher.
  • A customer who borrows £3,000 on a credit card at 19 per cent interest and makes minimum repayments would take 27 years and seven months to pay off the debt.
  • But if they repaid £74 a month it would take five years and two months. The interest would be £1,576.
  • And if they set their monthly repayment at £108 a month, they would pay off their balance in three years. The interest charged would be £879.

The FCA said it had identified nearly 5.1million credit cards that will take more than ten years to pay off.

Under the plans, banks will have to advise these customers after 18 months that they can reduce the cost of borrowing and time taken to repay if they increase their repayments. Banks will have to make a more drastic intervention after 36 months, including card suspensions and reduced interest charges. The FCA said this would save customers between £3billion and £13billion by 2030.

Wes Streeting, a Labour member of the Commons Treasury committee, said: ‘These measures are a step in the right direction but are too little, too late.

‘We have ended up in a situation where the economy is exposed to significant risks as this boom in unstainable household debt has been allowed to continue.’

Richard Koch of the UK Cards Association, which represents banks, welcomed the FCA proposals. He said the industry was not complacent and would help the minority who did not use credit cards sensibly.

He added: ‘We will look closely at the proposals and engage constructively with the FCA.’

Charlotte Nelson, of the Moneyfacts website, said: ‘While the FCA proposals are a great step in the right direction in helping those struggling with debt, unfortunately there is the suggestion it can be up to three years before a borrower heavily in debt will see any real action in sorting out their finances.’

Mike O’Connor, chief executive of the StepChange Debt Charity, said: ‘The proposals do not address the fundamental question of how credit cards trap people in persistent debt.

‘These measures will still potentially leave people paying back substantial amounts over extended periods of time.’

Shoppers put another £562million on plastic last month, or £20million a day. Families now owe a record £67.3billion on cards – £2,500 a household

Comments are closed.