Credit card companies lack incentives to help customers struggling with persistent debt, the Financial Conduct Authority has found – and it proposes new 'customer alerts' to signal the end of promotional periods as part of a package of remedies.
The financial regulator this morning published the final findings of its study of the credit card market that included measures designed to assist consumers in taking better control of their spending.
While it found competition in the credit card market generally works in favour of consumers, it also identified concerns about the scale of problematic debt.
In particular it highlighted how card firms did not have strong incentives to help customers with persistent debt because they made money from them.
The report said: "Firms have fewer incentives to address consumers with persistent levels of debt or who repeatedly make minimum payments as these consumers are profitable. We found that most firms do not routinely intervene to address this behaviour."
The Financial Conduct Authority's (FCA's) package of remedies includes:
- Prompts by email, text and letter before promotional periods end, so customers know when rates will change.
- Information to prompt consumers to take into account how much they're borrowing and avoid over-limit charges.
- Giving consumers the ability to choose the payment due date.
Some of the remedies to the problem of persistent credit card debt will be delivered through FCA rules (subject to consultation); others will be achieved through voluntary agreements on the part of the credit card industry.
It's hoped the measures outlined in today's report will help consumers to shop around for the best deals, budget better and, if they need to, repay their debts quickly.
The measures will also be designed to incentivise firms to prevent customers from getting into debt in the first place.
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MSE consultation response highlights 'unaffordable credit card debt'
MoneySavingExpert.com responded to a consultation on this back in January 2015, in which we made several observations about the issue of unaffordable credit card debt.
One of the areas we flagged was that minimum repayments are a trap that too many customers fall into. We argued that, to protect customers, a combination of much stronger information and a wider choice of payment amounts should be provided to customers taking out a credit card.
We also called for every monthly statement to include a strong warning, such as:
In its final report, the FCA mentions the prospect of increasing minimum repayments.
If you make the minimum payment on this card, at the current interest rate and current balance, it will take you xxx years to pay off in full and cost £xxx in interest.
"Before considering whether to bring forward proposals to increase minimum repayments, we want to understand how effective... [they could] be in encouraging consumers to repay at a faster rate where they can afford to do so".
Two million people carry persistent debt on their credit card
In November 2015 the FCA published its interim report of the credit card market study, a market which has more than 30 million cardholders in the UK.
The FCA's interim findings raised concerns about the scale of potentially problematic credit card debt. It found 6.9% of cardholders (about two million people) in arrears or default, a further two million carrying persistent debt on their credit card, and another 1.6 million repeatedly making minimum repayments.
It also found 8.9% of credit cards active in January 2015 (5.1 million accounts) will – on current repayment patterns and assuming no further borrowing – need more than 10 years to have their balance paid off.