Credit card review "urgently needed"

Credit cards represent the single biggest source of unsecured debt for people who are struggling to pay their bills.  Now the Financial Conduct Authority (FCA) has announced it will carry out a competition review of the industry later this year.

In a detailed analysis of almost 400 Debt Advice Foundation clients with debts worth £9.1 million, credit cards were the largest category and represented £3.7million – 40 per cent of the total.

Unsecured loans totalled £3.4 million. The next largest category was overdrafts, totalling just over £700,000.

Payday loans were eighth on the list, with £96,000.

Almost all clients in the analysis had more than one credit or store card, with one listing eight store cards and five credit cards.

David Rodger, Debt Advice Foundation chief executive, said: “We are delighted that the Financial Conduct Authority (FCA) has announced this market review.  In our view it is urgently needed.

“We've felt for some time that the sheer numbers involved make this far and away the most damaging sector when it comes to financial impairment.  Yet credit cards seem to have flown beneath the radar with recent investigations into credit industry practices focusing elsewhere.

“We want to see a wide ranging investigation into the business practices of credit card providers, particularly the appropriateness of unilateral credit extension facilities. 

“We hear from people daily who genuinely believed that because they were offered a new card or an increased credit limit, they would be able to cope with the repayments.  And we get many calls from people facing retirement on a state pension with no idea how they are going to clear credit card debts which have been sustained for years.

“When you're struggling financially, it takes immense discipline not to make use of that extra £5,000 that's just landed on your doorstep.

“Most people don’t do the sums themselves, they don’t realise that credit card companies are encouraging them to keep rolling the debts over from month to month. “What appears to be a reasonable interest rate on a balance of £10,000 adds up to large, often, unmanageable repayments.

 “The headline interest rates may appear manageable, but there is no endpoint as there is with a personal loan.  People begin to view servicing their credit card debt in the same way as a heating bill – something that is always with them.”

Debt Advice Foundation analysed a snapshot of 386 clients, from throughout the UK, who had reached a similar position in their journey.  The snapshot was taken in September 2013.

The research found that creditors per client ranged from one to 2, with 2770 instances of credit were owed to more than 600 creditors.

Total unsecured debts were £9.1million, with individual debts ranged from £1000 to more than £200,000.

The 10 largest categories of debt were:

  • Credit cards        £3.7million
  • Loans                  £3.4million
  • Overdrafts           £701k
  • Government        £250k (Includes Department of Work and Pensions, HMRC, National Insurance and Child    Support Agency)
  • Store cards*        £200k
  • Housing               £198k
  • Catalogues          £144k
  • Payday loans       £96k
  • Business              £80k
  • Council tax           £48k

*This category includes some cards which are issued by store brands but are actually credit cards.

For more information on the FCA credit cards review, click here