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.

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

Which Credit Report Information Can Landlords See

Whenever you rent a property, you will be required to pass some checks set by the landlord or letting agent to prove that you will be a good tenant and that you’ll be able to afford to rent the property.

Published on 19 Mar 2018 by Kevin Pearce

Full Article

Do Student Loans Affect My Ability to Get Credit?

For many people, a student loan is the single largest chunk of borrowing they ever take out, second only to a mortgage. With course fees alone now coming to more than £9,000 per year and then the added maintenance loan on top of it, you can easily end up borrowing £40,000 during your studies.

Published on 8 Mar 2018 by Jamie Mackenzie Smith

Full Article

How Far Back Can I get my Credit History?

For your recent payment history information, your credit file has everything you need; that’s why it’s given so much importance by lenders whenever you apply for credit. But if you’re looking for information that’s six years old or more, it’s probably not be the best place to start.

Published on 7 Mar 2018 by Jamie Mackenzie Smith

Full Article

Are Car Insurance Premiums Calculated Fairly?

Recently news stories have emerged alleging that a “John” might be more likely to get a cheaper car insurance quote than a “Mohammed”, and that someone with a Gmail account could be offered a lower premium than someone with a Hotmail email address.

Published on 12 Feb 2018 by Jamie Mackenzie Smith

Full Article
keyboard_arrow_left

keyboard_arrow_right

We have loads of great customer reviews