MSE founder Martin Lewis has welcomed Labour's pledge to cap credit card interest so that no one pays back more than twice the amount of their original borrowing.
In a speech at the Labour Party conference in Brighton today, Shadow Chancellor John McDonnell will say there is a 'debt crisis' with three million people trapped in persistent debt.
He will call on ministers to apply the same cap on credit card debts as on payday loans, limiting interest and charges to 100% of the amount borrowed. So if you borrowed £1,000, the most you would have to repay is £2,000.
'This type of discussion is a positive step'
MoneySavingExpert.com founder Martin Lewis said: "Labour has today agreed to support a call to cap credit card interest, so that the cost can't be more than the amount borrowed. This is similar to the current payday loan total cost cap, that I was involved in campaigning on. I hope other parties follow suit. So let me bash out some back-of-the-envelope analysis...
"Credit cards are like fire. Used right they're a great tool. Used wrong they burn. This change would help those who are stuck in a debt trap – which can kibosh quality of life and wellbeing.
"Specifically it would impact those on standard 18.9%-ish or higher APRs stuck paying the minimum repayments for decades.
"It's important to understand credit card minimum repayments are a little bit of commercial genius, because they only just cover the interest. That means you hardly ever pay anything off, instead you're just perpetually in debt, constantly accruing more interest, providing the lender with an income stream for years.
"Borrow £3,000 at 17.9% making just the minimum repayments (on a typical card) and it can take 27 years to clear at an interest cost of £4,000.
"Yet the minimum repayment in month one is £70; if instead you fixed your repayments at this every month (rather than minimum repayments which reduce as you owe less) you'd clear the debt in seven years costing £1,500 in interest.
"Of course there are some questions with this policy: how would it work for those borrowing dribs and drabs? Would the cap be inflation-linked as that has a big impact over many years? Should it apply to all unsecured borrowing?
"Yet overall I think this type of discussion is a positive step, without messing up the competitive marketplace too much."