Credit Cards: Cost Regulation

Kirstene Hair Excerpts

Wednesday 7th February 2018 Westminster Hall

[Stella Creasy]

I happily join the hon. Gentleman in supporting Christians Against Poverty, which very kindly came and ran a workshop for activists in my local community not a few weeks ago, to help residents to understand what they should say to somebody who is struggling with debt.

People often do not see credit cards as debt because they are just a fact of life. We know that the Financial Conduct Authority will tell the Minister that the market is working well for most, and that people shop around when getting a credit card, are able to compare rates and understand what they are buying. However, the problem comes when we look deeper and see the connection between those who struggle with debt and the nature of the credit cards they have.

Credit card debt is £263 billion—about 15% of total household debt—but it accounts for half of all interest payments made each year. That is the first signal that we need to look more closely at the interest rates on these cards. A whopping £28 billion is repaid each year, which accounts for 41% of all consumer debt, up from 33% in 2008. The average balance of those making just minimum repayments—the zombie debtors, who are paying off the interest but not the capital—is about £5,000; that is what they owe. However, 15% of zombie debtors owe more than £10,000. Crucially, when the FCA looked into this, it found that 20% of the people who ended up paying interest on their credit card did not expect to do so when they took it out. The reason is that life does not always go the way we expect it to. Jobs disappear. Relationships break up. The cost of living gets higher and higher.

Little wonder that there are 5 million accounts that, with people making just minimum repayments, it is estimated it will take 10 years to pay off the balance. It is no wonder that four in 10 British adults are worried about their credit card debt. They understand that what seemed like the best way to manage their finances has quickly got them into a situation that they cannot get out of. Forty per cent of adults in this country say that they struggle to make it to payday and, of those, 30% say that credit card repayments are causing them the problem. The FCA has identified that; it has identified those people whom it would say are in difficulty because of their credit card debt. It considers more than half those people to be “potentially vulnerable” because they have few resources to fall back on, even if they are managing to make some repayments.

The FCA has also identified that one third of people do not really understand the interest rates that they are paying on their credit cards. Again, it is the point about interest rates and what it will actually cost people to use these cards, even if they are flipping between zero-rate-interest cards. It identified that people who switch are switching because they think that they are getting a better balance offer—crucially, they are not getting out of debt.

The point of today’s debate and raising this issue with the Minister is to ask him not to wait until the situation gets worse, because we know the consequences of waiting until it gets worse. Let us learn the lesson from those legal loan sharks, the payday lenders—the people who were lending £100 to people who were ending up paying an average of £260 back. They were using payday loans when they were unregulated to pay for their basic living; 53% of them were using them just as people are using credit cards—to pay for groceries and utility bills. They were paying for things that they could not go without. Three in five borrowers on a payday loan said that they could not go without the item for which they had taken out the loan.

Let me tell the Minister that when we do act—when we recognise the consequences of leaving a situation to fester, as we did with payday loans—it makes a massive difference. Bringing in a cap on the cost of credit saw a 45% reduction in the numbers of people going to the citizens advice bureau in difficulties with payday loans; indeed, there has been an 86% reduction since 2016.

These credit card companies are truly loan sharks pretending to be the good guys. We know that what matters is in the small print. Many of us may have looked at our own credit card interest rates and seen that they vary from between 0.8% and 2% a month, but we also know that those basic interest rates on credit cards have been rising over the past 11 years, from an average of 15% to 23% now. As the hon. Member for South Antrim (Paul Girvan) pointed out, the zero balance transfer deals have been lengthening, but what is happening is that the credit card companies are making up for competing to get people to switch, by increasing the interest rates. And that is before we get on to the credit cards for people who are in bad credit—the new Wongas: the Vanquises, the aquas and the Capital Ones, which offer interest rates of 30% to 60%.

The Minister will point me to the research by the Financial Conduct Authority that shows that about 45% of people borrowing on cards for those with bad credit have found them useful for building up a credit history, but let us think about the other 55%—those who, as the FCA has identified, are in severe or serious arrears as a result of getting these cards. I see Vanquis in my town centre in Walthamstow, preying on people.

[Kirstene Hair (Angus) (Con)]

The hon. Lady mentions the FCA. In December 2017, it published revised proposals that would see lenders reduce or even cancel credit card interest and charges for customers who are in persistent debt, so positive work is going on.

[Stella Creasy]

I thank the hon. Lady for pointing out the research that I am quoting and the paper that I have read. This is my concern. Having read exactly what the Financial Conduct Authority is doing, I think that it is missing a trick, and I am appealing to Ministers to intervene. Let me explain why.

We can look at companies such as Vanquis, which offers people £1,000 straight off—no credit checks, no questions asked. It is owned by Provident, which is a high-cost-credit legal loan shark. It targets people with the blithe claim that as long as they can afford the minimum repayment every week, they can rebuild their credit. Alternatively, we can look at the aqua credit card, with an interest rate, superficially, of 3.9%. If someone borrows £1,000 from that company and makes the minimum payments, they will have paid £480 within one year, £680 within 18 months, £800 within two years and £1,000 in interest by 28 months. Those figures reflect exactly the sort of lending and patterns of repayment and costs of interest that we recognised were wrong for payday lenders, yet now that is happening in the credit card industry.

There is a simple principle at issue here. We recognised that it was wrong to ask people to pay back more than they had borrowed; up to 100% was a fair amount of interest to be charging. Why have we intervened and said that that was wrong in the payday lending industry, but are letting it happen with credit cards? That is exactly what is happening: people are paying back in interest double what they have borrowed.

Yes, the FCA conducted a market study, and yes, parts of the market are working well for some consumers. Therefore, if we act where the market is not working well for the other consumers, we can stop these problems before they get worse. I do not understand how the FCA can justify not bringing the same lessons that we have learned from payday lending, about not asking people to pay back in interest double what they have borrowed, to the credit card companies, even though we recognise that that is wrong in the payday loan industry—but that is what has happened.

All the FCA’s remedies at the moment require people to have the cash to be able to act—to be able to make quicker repayments and to be able to pay back earlier—when actually what we are seeing is a nation that does not have spare cash in its pocket, let alone when facing economic shocks. These companies are entering into voluntary agreements with the Financial Conduct Authority. We are not learning the lessons of asking legal loan sharks, like turkeys, not to speak in favour of Christmas. These companies are making millions of pounds from pushing people into debt in exactly the same way as the Wongas of this world did, yet still the FCA is standing by.

There are things that we can count on in the coming months. We can count on the fact that the economic situation will still be uncertain for people, that there will still be precarious work as the new norm, that people will not be able to plan. We can count on the fact that the cost of living is still going to go up—that if we want to put food on the table, keep a roof over our head and put petrol in our cars to get to work, it is going to get more expensive. We can count on divorce, house moving and redundancy still being facts of life. And yes, we can count on the fact that some parts of these markets work well, but not enough of them do, so I am asking the Minister to learn from history. Do not wait until millions more British people are stuck in spirals of debt with credit cards. Do not think that credit cards are acceptable and high-cost credit and payday lending are things of the past. This market is mutating, but it is still firmly focused on exploiting communities such as mine, exploiting people in financial difficulty, exploiting people who have few options. If the FCA feels too timid to be able to act, then just as we did before, let us give it muscle. Let us bring in a cap on the cost of credit cards, just as we did with payday lending, and recognise legal loan sharking in this country for what it is. I look forward to what the Minister has to say.