Evaluation Scotland Wales
The UK Strategy for Financial Wellbeing is taking forward the work of the Financial Capability Strategy Opens in a new window

insight

Regulating the credit card market: cap on costs

Evidence type: Insight i

Context

As of April 2019, UK households owed £217 billion, representing the highest levels of household debt on record and more than immediately before the financial crisis in 2008. High levels of debt are disproportionately common within poorer households. Among those households who spend more than one-quarter of their income on debt repayments (considered the threshold for ‘overindebtedness’), almost half earn less than £15,000 per year. Around one-third of all consumer debt is due to credit card use, with credit card debt growing by 25 per cent over the past five years. People on lower incomes are borrowing more on their cards in proportion to their income, and for longer periods of time.

The study

This 2019 briefing paper from the Centre for Responsible Credit (along with Jubilee Debt Campaign, New Economics Foundation and Research for Action), presents new analysis of the impact of credit card debt on low-income households. The report uses data from the Bank of England’s 2018 Household Survey, which is conducted by NMG Consulting. The data was collected in 2008, and is based on responses from around 6,000 people. The report uses the findings to produce a set of recommendations for Government and stakeholders in order to address the problem of high-cost and persistent credit card debt.

This report was made possible by the assistance of the Barrow Cadbury Trust, an independent, charitable foundation committed to social equality.

Key findings

  • One-third of credit card borrowers have a balance at the end of the month that they cannot pay off in full.
  • Almost one-in-five borrowers (18 per cent) are using their credit cards to pay for food or other living costs, with a further 12 per cent using their cards for unplanned emergencies such as replacing appliances or car repairs.
  • The percentage of people using their cards for the above purposes increases to 40 per cent among those living in households with pre-tax incomes of less than £15,000.
  • A further one-in-five (20 per cent) of low-income credit card borrowers used their credit card to refinance existing credit card debt, or to pay off other types of debt.
  • The credit card debts of these low-income households averaged £2,900, which represented 68 per cent of the average total consumer debt of £4,250.
  • These borrowers have an average total debt-to-income ratio of 50 per cent, with an average credit card debt-to-income ratio of 34 per cent.
  • Recent years have seen an expansion of high cost credit cards targeted at people with poor credit ratings. These cards charge interest rates of up to 80 per cent per year. Low-income households using these cards to pay for essentials are paying a ‘poverty premium’, often paying back two-to-three times the amount they originally borrowed.
  • Despite recognising the success of the payday loan cap that was introduced in 2015, the Financial Conduct Authority (FCA) have so far “brushed aside” calls for a similar cap on credit cards.

To address the above problems, the report sets out the following recommendations:

  • The FCA should immediately introduce a regulation stating that no lender can charge a total cost (interest and fees) of more than 100 per cent of the amount initially borrowed on the credit card.
  • The FCA should implement an immediate review of lending practice including analysis of how lenders are prompting customers to increase their payments and whether these are actually affordable.
  • If the FCA does not take these steps, they should be obliged to do so by HM Treasury. If this doesn’t occur, MPs in the Treasury Select Committee and Parliamentarians in general should tackle this perceived “regulatory failure”.

Points to consider

Methodological strengths and limitations:

  • This report is based on a large survey from the Bank of England. However, relatively few details are given on the methodology, so we do not know if the data is weighted to be nationally representative, or whether findings have been tested for statistical significance where relevant.

Relevance:

  • This report is relevant to all stakeholders and policymakers with an interest in credit card debt within low-income households. It is of particular relevance to those who may be researching or arguing for a cap on credit card interest and fees.

Generalisability/transferability:

  • This report refers to the credit card and lending sector, which is situated in a fast-moving regulatory environment. Therefore, the findings and recommendations in this report may quickly become dated.

Key info

Year of publication
2019
Country/Countries
United Kingdom
Contact information

Centre for Responsible Credit, with Jubilee Debt Campaign, New Economics Foundation and Research for Action