Watchdog to probe credit card debt traps

AN INVESTIGATION into whether credit cards are being sold in a way which exploits people’s tendencies to take on too much debt is to be launched by the City regulator.

The FCA plans to find out how easy it is for customers to shop around and switch to the best deal. Picture: PA

The Financial Conduct Authority (FCA) yesterday outlined the proposed scope of its market study into the credit card industry which was first announced in April.

The regulator, which took over supervision of the credit card market earlier this year, wants to uncover the reasons why some consumers might be over-borrowing or under-repaying their credit card balances and how widespread the problem could be.

It plans to find out how easy it is for credit card customers to shop around and switch to the best deal for their needs, how transparent or complex the fees attached to credit cards are and how consumers’ behaviour is being influenced by the market.

The regulator said: “We will look at whether credit cards are marketed and sold in a way that exploits or exacerbates consumer behavioural tendencies with respect to over-borrowing.”

The move was welcomed by debt charities, which said too many people are being “trapped” into problem debt by their credit card.

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Debt charity StepChange said its clients typically hold just under three credit cards each and the average card debt they have is £9,047.

UK consumers hold around 70 per cent of all credit cards in Europe, with more than 200 different products to choose from, many offering an array of perks to woo customers, such as 0 per cent interest on new purchases or balance transfers for a specified period of time and rewards such as cash back and air miles.

Around 30 million consumers, or 60 per cent of the adult population, hold credit cards. Collectively, these account for £56.9 billion worth of outstanding debt.

As part of the probe, the FCA plans to look at whether highly indebted customers are generating a disproportionate amount of revenue from firms. It said a “key focus” will be looking at whether and why firms might provide unaffordable lending.

The regulator will look at firms’ business strategies, as well as how a consumer uses their credit card is linked to how much money a firm makes.

Mike O’Connor, chief executive of StepChange, said: “Too many people are using credit as a safety net when all too often it is a trap which leads to problem debt.

“Credit card debt is one of the most common debt problems we see. Many people are struggling with multiple debts, high balances and interest rates.”

Richard Koch, head of policy at the UK Cards Association, the trade body for the industry, said: “The industry has a long-standing commitment to responsible lending and transparency and over the last five years has introduced many changes including on credit limits and re-pricing of debt, improved transparency, and forbearance for those who find themselves missing repayments.”

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