Solutions

Cap the cost of credit

Cap the cost of credit

Credit cards and other debt need to be regulated like payday loans.

Approximately eight million people are caught in a debt trap: paying out an average of a quarter of their incomes each month to their lenders. This high level of repayments, which will typically need to be maintained for a period of about five years, is unsustainable. It is placing household budgets under extreme pressure and inevitably leads to more borrowing to pay off previous debt, and often simply to make ends meet.

The debt trap is not the fault of a few​‘rotten apples’ – lenders operating at the margins of regulation. It results from a system of​‘risk-based pricing’. This incentivises lenders to target people who they know will struggle to repay with high cost credit. The high cost of credit covers the high default rates. It is profitable, and even more so when lenders structure their products in ways which levy high default fees or encourage continual refinancing.

The Financial Conduct Authority should immediately introduce a rule that no credit card lender can charge a total cost (ie interest, fees or any other charges) of more than 100% of the amount borrowed. This should be implemented alongside the current persistent debt rules, which should be retained.

The FCA should also conduct an immediate review of lending practice in response to its persistent debt remedies, including analysis of how lenders are prompting customers to increase their payments and whether these increases are genuinely affordable. If the FCA is unwilling to take these steps, then it should be asked to do so by HM Treasury.