The Blog

After 50 Years of the Credit Card, We Need to Look at Its Link to Problem Debt

It's 50 years since the launch of the credit card. I cannot remember the launch itself, but I have had at least one for most of that time. I am far from alone - there are now 59 million credit cards in the UK and more than half of us have one.

For many people, credit cards are a convenient way to pay and they have become many people's first port of call for credit. Some people never pay interest and charges and there is extra protection in disputes with vendors. They can also be a way to spread the cost of large purchases over a few months.

For too many other people however, credit cards are a very costly form of borrowing and can lead to long term, expensive debt. The Financial Conduct Authority (FCA) estimates that five million cards will already take more than ten years to clear at their current rate of repayments. The average interest rate on credit cards (excluding those at 0%) is around 18% - some are much, much higher.

At StepChange Debt Charity, we were contacted by over 200,000 people struggling with credit card debt last year alone. They owed nearly £1.7bn at an average of £8,403 each, which is equal to half of their average annual take-home pay.

The FCA is currently reviewing the credit card market. Too many regulator market reviews rely on information/competition remedies and I hope the FCA take action to reform the credit card market to make it work better for consumers, particularly those in financially difficulty. StepChange Debt Charity have previously called on the FCA to reform credit cards in several different ways.

Under current rules, lenders can increase someone's credit card limit without consulting them if they give 30 days' notice in which to decline. When we asked our clients who are struggling with credit card debt, 54% said this had happened to them, and half of those said it had made their debt problems worse. We estimate this to be over 50,000 people.

There are fundamental problems with this approach to lending. Before anyone takes on credit, they need to be able to decide whether borrowing is the right option. They then need to decide which type is best for their situation, weigh up the risks and decide if they can afford it, including if their income drops. Raising someone's credit limit without asking them skips these vital steps and takes control away from the borrower. For people already in financial difficulty, a message from a lender that they will lend them more is a nudge which leads to them borrowing more, getting them even deeper into trouble.

We want the FCA to put borrowers back in control by making credit limit increases opt-in, rather than opt-out. This way, people will need to actively consent to increases, rather than the decision being made for them. Who would lose from stopping this damaging practice?

Minimum repayments currently have to be 1% of a credit card balance, plus any interest and fees. This can see credit cards become long term financial products, which can prove to be very expensive and lead to further debt problems if they become unmanageable. The FCA points out that 1.6 million people are making systematic minimum repayments on their credit cards and that firms are not routinely intervening to address it. Repaying just the minimum can mean it takes over 18 years to pay off a credit card debt of £1,000.

With small changes to minimum repayments, the length of time it takes to repay could be slashed and people could make significant savings in interest. If, for instance, minimum repayments were fixed, rather than reducing with the balance of the card, it could reduce the repayment term on a £1,000 debt from 18 years to just five and save around £730 in interest. If this were combined with raising the minimum repayment from 1% to 2%, the term could be cut to just three years, saving £950.

Increased forbearance and early detection

When people begin to show warning signs, such as exceeding their credit limit regularly or consistently making minimum repayments, providers need to quickly identify them and offer assistance. This needs to be in the form of forbearance and affordable repayment plans so people can get back on their feet and avoid falling into severe problem debt.

Of course borrowers have a responsibility to judge that their borrowing is affordable when they take it out, although unforeseen events, e.g. illness, relationship breakdown, often lead to problem debt, but lenders must take their share of the responsibility as well. The FCA now has an opportunity to take some simple steps to ensure that credit cards are the affordable, short term products they were designed to be, rather than a too-often-trodden route towards problem debt.