Concerns that the credit card industry creates, and then milks, over-indebted consumers are not new. It was as long ago as 2003 that Matt Barrett, then chief executive of Barclaycard owner Barclays, generated headlines when he told MPs that he had advised his children never to borrow on a credit card “because it’s too expensive”.
His analysis was spot on, of course, which is why it is so alarming that the FCA says 3.3 million people in the UK are in persistent credit card debt, defined as those who are repaying less in principal than they are paying in interest and charges over a period of 18 months. The financial pain can be delayed by teaser rates and zero-interest periods but, when it comes, it can be severe.
The FCA offers the illustration of a customer with a £3,000 debt on a credit card with an annual percentage rate of 19%. If paying as much in interest and charges as in principal, it would take almost 20 years to clear the debt and £2,900 would be paid in interest.
When a financial product is so lucrative for the lender, the market won’t reform itself. Royal Bank Scotland, commendably, has taken a principled stand against teaser rates on credit cards since 2014 – “We will not be in the business of trapping people in debts they cannot afford,” said the chief executive, Ross McEwan – but few other big banks are interested.
In the circumstances, the FCA is right to intervene. It proposes that after 18 months credit card firms must prompt persistent debtors to make faster repayments. After another 18 months, they must suspend the card. And, in certain circumstances, interest and charges would have to be scrapped or reduced for customers unable to make faster repayments.
There will be grumbles about nanny-state intervention. Ignore them. While the plastic works fine for most people, credit card debt has become more like a high-interest personal loan for the 3.3 million in persistent arrears. That is not how the product is meant to operate. Unless lenders are forced to accept a few obligations to borrowers, the grubbier end of the credit card industry will look outright exploitative. Nils Pratley