A new report, published jointly by CfRC, New Economics Foundation, Jubilee Debt Campaign and Research for Action today, shows that the FCA are failing to adequately protect consumers from high interest costs on credit cards, and calls for a cap on the total cost of charges that borrowers pay.

The report includes new analysis of the Bank of England’s Household Debt Survey for 2018, which indicates that almost half of the poorest households are using their credit cards to pay for food or other living costs or to deal with unplanned emergencies.  Many of these borrowers are still paying more than £2 for every £1 borrowed despite recent rule changes from the regulator intended to address the problem of ‘persistent credit card debt’.

Credit card debt has been growing alarmingly in recent years.  It now stands at £72.4 billion – around one third of all consumer credit lending, which at  £217 billion is the highest level on record.  The growth in credit card debt has also outstripped household income growth over the past five years.

Analysis of the Bank of England’s Household Debt Survey reveals:

  • Almost half of those spending more than one-quarter of their income on debt repayments – the threshold for what is considered ‘over-indebtedness’ –earn less than £15,000.
  • One-third of all credit card borrowers have a balance that they cannot clear at the end of the month.
  • 18% are incurring debts on their credit cards to pay for food or other living costs and 12% to meet an unplanned emergency expense such as car repairs.
  • The percentage of people using their cards for these purposes increases to 40% among those living in households with pre-tax incomes of less than £15,000.
  • A further 20% of low-income credit card borrowers used their credit card to refinance existing credit card borrowing or to pay off other types of debt.
  • The credit card debts of these low-income borrowers averaged £2,900; 68 percent of their total consumer credit debt of £4,250.
  • These borrowers have an average total debt to income ratio of 50 percent, and their average credit card debt to income ratio is 34%.

The report warns that the ‘persistent credit card debt’ measures introduced by the FCA in 2018 are failing to adequately protect consumers from high interest costs and calls for a cap on the total cost of charges that borrowers pay.  It also points out failures in the FCA’s previous review of the credit card market. Despite having conducted a two-year study of the market between 2014 and 2016, the FCA did not provide any analysis of the uses of credit cards, and the amount of interest and fees being paid, by income group.  It also failed to adequately consider whether lower income borrowers could afford the higher minimum payments that its rules now require lenders to request of them.   The FCA has indicated that it does not intend to review the impact of its rule changes until at least 2022.

Damon Gibbons from the Centre for Responsible Credit (CfRC), who conducted the research on behalf of the coalition, said:

“It is outrageous that people using credit cards can still pay more in interest and fees than they would if they borrowed from a payday lender. This continues despite the FCA’s recent rule changes, which are inadequate to address problems in this market. Despite having the power to introduce a cap on the cost of credit card debt the FCA has conducted no detailed assessment of this option. Just as it did with payday lending, Parliament should now intervene and force the FCA to impose a cap.”

Andrew Pendleton, Director of Policy at the New Economics Foundation, one of the Coalition groups, said:

“With incomes squeezed and costs rising and with the fiasco of Universal Credit, many of the poorest households in the country are turning to their credit cards to make ends meet, but then sinking deeper into the debt trap. It’s a growing crisis and it’s shocking that the FCA does not have a handle on it.”

The report calls for an immediate cap on the costs of credit card costs (similar to that applied to payday lenders in 2015), and for an immediate inquiry into the reasons for the failures of the FCA’s previous review to properly consider the position of lower income borrowers.