When even the Financial Times is guilty of sensationalist and arguably misleading headlines on consumer debt, there is reason to look at the actual figures with extra care.
UK credit card debt rises 10% in January screamed the headline in the FT on 1 March. The headline remains online, uncorrected as CI goes to print. For the record, credit card debt rose by 9.6% in the year to January, an altogether different increase compared to the scaremongering headline.
The same article did at least acknowledge that growth in credit card lending has slowed in recent months as a result of the Bank of England and FCA voicing concerns about UK consumer debt. A quick check of other credit card stats to hand does, however, give ammunition to those arguing that credit card debt is rising too fast. Credit card spend in the UK rose by 8.3% in the year to February, its fastest rate since 2006. Credit card transactions rose by 3.3% year on year to 220 million transactions in February.
The FCA has been rather more proactive than a number of vocal and high-profile politicians care to recognise in taking steps to tackle problem credit card debt. According to the FCA, more than three million UK credit card holders are in what it terms “persistent credit card debt” – defined as cardholders paying more in interest and fees than they repay of their outstanding debt. Such cardholders typically pay interest charges of about £2.50 ($3.50) for every £1 of debt that they repay. A higher figure, about 8.3 million people, is given by the Money Advice Service for those lumbered with problem debt.
New rules kicked in on 1 March forcing credit card issuers to take a series of steps to help credit cardholders with persistent debt. Card issuers are obliged to engage with customers that have been in persistent debt for 18 months; the issuer is required to explain the benefits of increasing their payments, and tell them about where to get debt help and advice.
After 27 months, card issuers must again contact the customer if it looks as if the debt situation is unlikely to improve, and give a warning that the card may be suspended if they do not change their repayment behaviour. After 36 months, the issuer has to offer the cardholder a way to repay the outstanding balance over a reasonable period of say, three to four years. This may involve the offer of a personal loan at an interest rate way below the credit card interest rate.
While the new regulations have been welcomed by UK Finance, the banking sector lobby group, a number of debt charities remain concerned that the new rules do not go far enough. In particular, charities such as StepChange argue that the rules do not address the continuing risk that credit card issuers will allow new profitable customers to accumulate debt for a long period, “only to inflict unattractive compulsory action on them further down the line”.
And now Labour MP Stella Creasy is on the case of the credit card sector. An eloquent operator, Creasy was one of the leading campaigners against the high rates of interest and charges levied by payday lenders. Her campaign resulted in a cap on the payday sector – and now she is going after high-cost credit cards.
Creasy is one of a number of MPs lobbying the government to cap credit card costs – the very measure ruled out as recently as last year by the FCA. In particular, she wants issuers to be banned from charging credit cardholders more in interest and fees than the sum borrowed. We have been here before. As recently as last September, the UK opposition finance minister John McDonnell proposed what he termed a total cost cap on credit cards of 100% of the original sum borrowed.
There is certainly an argument that can be made that it is unseemly for credit card issuers to be lending to customers who are so likely to be unable to repay, so eye-watering rates of 60%+ are charged to make the credit card product profitable. For this writer, by instinct on the centre-right and wary of political meddling with the free market, there is also the argument that it is not for politicians to attempt to regulate the terms and conditions of bank products.
What the latest lobbying still fails to recognise is the limited number of credit cardholders their proposals would actually help in reality, not to mention the inevitable unintended consequences. To name just a few: credit card account cancellations, sudden demands for repayment of the full debt and customers with poor credit histories turning to doorstep lenders or loan sharks. The FCA rule changes do not fully come into force until September – they deserve a chance to work. If they do not, the credit card sector can expect the Creasy and co. campaign to intensify and support for her argument to grow.