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.

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