Questions raised on credit card affordability checks

Over a quarter of credit cards opened were in serious arrears just a year later

According to an investigation by the Financial Conduct Authority, a quarter of credit cards  aimed at borrowers with poor credit scores opened in 2013 were in severe or serious arrears by 2014. 
The report also found that over a fifth of people in severe credit card arrears in 2014 did not possess an active card just two years earlier. 
Around 750,000 cardholders have been only making minimum repayments on their credit card debt for at least three years and in that time 650,000 cardholders have been in persistent debt.
This raises concerns around how effective the affordability assessments carried out by the industry are and whether credit card companies have a role in helping consumers to pay off their balances when they can afford it. 
Customers who have persistent levels of debt or who repeatedly make minimum payments are profitable and the FCA found that most firms do not routinely intervene to address this behaviour.
However, the regulator claimed that consumers who are defaulting on repayments are extremely unprofitable and so firms are active in contacting them.
The investigation also discovered that although consumers are unafraid to switch credit cards, they may not always ending up choosing the best one for them. This is because rates advertised may not necessarily be the rate the consumer is offered after a credit check.
A consumer survey found that 80% of respondents considered only the introductory offer on balance transfers or the cost of the balance transfer fee when choosing a credit card, but not both. 
The FCA believes there is less competition between credit card companies on interest rates outside of promotional offers, as consumers often don’t think about finding a competitive rate for when the introductory offer ends.
Higher risk consumers, for example those who have a poor credit rating, were shown to have a much more limited choice when it came to getting a good deal, with four credit card providers accounting for virtually all accounts in that customer sector.
The FCA consulted with the credit card industry and set out a package of planned measures to help consumers take better control of their spending.
The industry, represented by the UK Cards Association (UKCA), has agreed to alert customers when their promotional offer is due to end or at a set point of credit limit utilisation, allowing consumers to plan more effectively to pay off balances or allowing them to switch credit cards. 
The regulatory body is exploring the possibility of ditching set “minimum payments” to allow consumers to choose their repayment amount.
There have also been proposals put forward to stop potential debt issues before they become debt problems, such as requiring firms to identify early signs of debt problems or requiring them to take certain actions to intervene when a consumer has been persistently indebted for a long period. 
Debt Advice Foundation CEO David Rodger said of the recommendations;
“Debt Advice Foundation welcomes these new measures to tackle the problem of persistent high credit use. 
“Carrying large amounts of credit card debt for long periods is a clear red flag that a borrower is struggling.  In fact, credit cards account for over a third of unsecured debt the charity deals with.  
“Hopefully these new initiatives will help to tackle the problem of persistent debt at an earlier stage and before they require our help.”

If you are finding it difficult to pay your credit card bills, contact our advisers for a confidential discussion on 0800 043 40 50.