Credit Card Debt is growing at its fastest rate for 11 years
Yesterday, I came home from work and saw in my letterbox a letter from a credit card company offering me a 0% balance transfer for 42 months with a transfer fee of 3%, or a 0% money transfer (to my bank account) for a 3.5% fee. How nice of them to offer me a loan with c.1% p.a. interest! With a £7,500 credit limit on my card, what should I do with this generosity? Buy a new car to replace my 10 year old Fiesta? Go on a Caribbean holiday when I only usually make it to Cornwall? Extend my overcrowded house with a conservatory?…or, as in my case, vow to live within my means and politely decline the generous offer and recycle the letter.
With such temptations from card companies, it is no surprise to read the latest Bank of England figures from May 2017 which show that UK consumers borrowed £68.1 billion in April 2017 alone. This was an increase of almost 10% on the same time last year and also means that credit card debt is accelerating at its fastest rate since February 2006.
Furthermore, according to the Financial Conduct Authority (FCA), 3.3 million people have credit card debts they might never be able to clear. This figure shows that for some, credit card debt is no longer a short term way to borrow money, which is no surprise with 0% balance transfer offers lasting over 3 years. Of course, when that period has expired then interest charges of around 19% could apply and the card companies rely on consumers to forget this small detail. The FCA has been critical of lenders who it has accused of exploiting millions of customers unable to pay off their credit cards and remarked that lenders had ‘little incentive’ to help customers who could pay £2.50 in interest for every £1 repaid on their cards as these customers are very profitable to financial institutions.
Because of this, the FCA has proposed new rules for lenders to help customers with persistent credit card debt. For instance, the FCA proposed that where a customer has had credit card debt for more than 18 months, their card provider should encourage them to make faster payments to clear this. Furthermore, if a customer remains in persistent debt after a further 18 months, lenders must take steps, such as proposing a repayment plan to help customers to repay their outstanding balances quicker. Customers who do not respond, or say they can afford to repay faster but decline to do so, could have their ability to use the card suspended.
The FCA had just finished consulting on these proposals on 3 July 2017, and it will be interesting to see what comes of this. Meanwhile, I wonder what temptations await for me in the letterbox tonight.
by Chris Medway, PKF Francis Clark