Credit card companies keeping borrowers in debt

Posted by Rebecca Stains in Personal Finance on 9 December 2014 - Rebecca worked as a Credit Analyst at checkmyfile until 2015

Credit card companies are to be investigated to see if they are making a profit from keeping some borrowers in debt for longer or by offering them extra credit that they do not need. The Financial Conduct Authority (FCA) will be examining account to see where they make their money.

A key concern of the FCA is that companies make excessive profit from those who over-borrow and under-repay. This causes borrowers to remain in a level of debt that leads to interest charges and other fees being paid, but without repayments to clear the debt.

A worry is that card firms target more of these types of customers so they can subsidise other customers for who repay borrowing in full each month.

As it stands, credit card firms require borrowers make minimum repayments, but these are only set at a level to cover the interest, fees and 1% of the outstanding balance. Repaying the overall debt at this rate would take a considerable amount of time and interest payments.

The FCA is concerned that the interest rates and fees are not made clear before the application is made and accepted. Even those who compare cards through price comparison websites appear to miss this vital information.

There is an additional concern that customers searching cards for one purpose, for example to do a balance transfer, are then being offered a card that could lead them into more debt. This includes being given a period of interest-free purchases or a high credit limit.

The FCA says that it “will look at whether credit cards are marketed and sold in a way that exploits or exacerbates consumer behavioural tendencies with respect to over-borrowing. A significant number of consumers appear to have a limited understanding of how to manage their cards in a sustainable way”.

The investigation has been welcomed by debt charities, who say too many people are being 'trapped' into bad debt by their credit card providers. Debt charity StepChange says its clients typically hold just under three credit cards each and the average card debt they have is £9,047.

Mike O’Connor of StepChange, says, “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. Many people are struggling with multiple debts, high balances and interest rates”.

The FCA is inviting responses to its market study between now and January 5. The investigation is expected to start early next year and could take around a year to complete.

The Advantages & Disadvantages of Store Cards

There are a number of reasons you might take out a store card: whether you’re just waiting in-line at the shop and find out you can save on today’s shopping or they offer the promise of making money in the future, these cards regularly find their way into wallets (or phones via an app). Most big retailers offer their own cards, which allow you to take your purchases home – often with a nice discount applied – without having to part with a penny at the till.

Published on 10 Jul 2018 by Tom Blandford

Full Article

What Happens To Your Credit Report When You Move Country?

Moving from one country to another results in a lot of changes and new things – a new place and culture, new job, new people and in some cases even a new language. However, one thing lots of people do not realise is that you will also be starting afresh when it comes to your Credit Report. Credit Reports and the information they contain are country-specific and do not follow you from one country to another.

Published on 27 Jun 2018 by Kirstie Day

Full Article

What To Do If You’re a Victim of Data Breach

Another day, another high-profile data breach, with the morning news bringing word of another leak of personal information that affects millions of consumers. This time it’s the turn of Dixons Carphone - the company behind PC World, Currys and Carphone Warehouse.

Published on 14 Jun 2018 by Jamie Mackenzie Smith

Full Article

What Does Bongo Know About You?

“What does Bongo know about you?” A slightly off-the-wall question I’ll grant you, but one that you might have been asked at some point in time.

Published on 7 Jun 2018 by Richard Catlin

Full Article

Why Don’t Millennials Take Out Credit?

As a millennial, it can feel like my generation is besieged with criticisms on a daily basis, and not all of them are entirely fair (though lots are). We are frequently told that as a generation we are entitled, we have it so much easier than our elders and arguably, worst of all: we buy too many avocados. While I don’t buy avocados, I do have access to credit, which makes me a minority among my age group.

Published on 16 May 2018 by Beth Jennings

Full Article

Why Is My Loan Balance Wrong On My Credit Report?

One of the single most important pieces of information to appear on your credit file is the information relating to your credit agreements and how you repay them - with this information lenders can see your borrowing history across the last six years and use it to help them decide whether or not to offer you finance.

Published on 7 May 2018 by George Coburn

Full Article

How long do closed accounts appear on my credit report?

Some people believe that as soon as a credit agreement is settled and closed, it will no longer be reported to the UK’s Credit Reference Agencies and therefore will no longer have an influence on future credit applications. However, this is a popular misconception, one that could affect your ability to get credit if not correctly understood.

Published on 2 May 2018 by Tom Magor

Full Article

How to Save Big in the Bank Holiday Sales

Bank holidays may not guarantee a day of sun-soaked fun, but as is British tradition, we’d probably be quite happy barbecuing in the snow if it came to it. But no matter what your plans are, if you want to grab a bargain, you can use the Bank Holiday sales to save some serious money.

Published on 26 Apr 2018 by Kiah Phillips

Full Article

Should I Buy or Finance an Aston Martin Valkyrie?

We’ve all been there. £3 million burning a hole in your pocket and a track-going version of Aston Martin’s latest hypercar sat in front of you. But as a shrewd, savvy business-type, you know that dropping £3m in one go on a 1,100bhp car could be considered a questionable, perhaps even ‘baller’ move. But what about putting it on finance?

Published on 13 Apr 2018 by Jamie Mackenzie Smith

Full Article

How to Build Credit History Without a Credit Card

When it comes to the best way to build up a credit history, conventional wisdom is to take out a credit card and use it for everyday purchases, while paying it off (on time) at the end of every month. There’s plenty to support this advice too, as a credit card allows you to spend as much or as little as your limit will allow, while building a history in a reasonably short amount of time.

Published on 26 Mar 2018 by Jamie Mackenzie Smith

Full Article
keyboard_arrow_left

keyboard_arrow_right

We have loads of great customer reviews