HARD-UP Brits forced to rely on credit cards aimed at the poor can end up paying more interest than they would with a payday loan, we can reveal.
Lenders are targeting families with weak financial histories with a new breed of credit card that charges up to 80 per cent interest.
New credit cards target struggling families who are normally excluded from most affordable rates from high street lenders[/caption]
Unlike payday loans the interest on cards is uncapped – meaning it can spiral into thousands more pounds and take longer to clear.
Today Sun Money calls for regulators to take action on credit card debt – and clamp down on them as they have with other rip-off credit products. We look at the key issues and what needs to be done.
What’s the problem?
SUBPRIME credit cards target high-risk borrowers with bad credit scores — meaning their APRs are much higher than average. The average credit card interest rate is around 20 per cent APR but subprimes vary between 30 and 80 per cent.
In return for lending to borrowers with low incomes, the card providers charge interest rates of up to 80 per cent[/caption]
Vanquis Bank is one of the worst offenders with its Visa card hitting a max rate of 79.93 per cent, while Aqua’s Advance card’s max is 59.9 per cent. The debt charity StepChange says these kinds of cards — which are owned by four million Brits — can be a low-cost way of borrowing if paid off promptly. They are also good for credit-building so you can work on getting a better score.
But struggling families are using them to pay for everyday essentials and then cannot afford the repayments. Around two thirds of StepChange clients with subprime cards said they had used more credit than expected, mainly driven by desperation.
Action group Jubilee Debt Campaign says someone who borrowed £500 on a Vanquis Bank card at 79.93 per cent APR and only made the minimum monthly repayments would take four years to pay it and would pay £751 in interest. That is a third dearer than a payday loan, which can only charge double the borrowed sum in interest and charges — in this case £500.
Didn’t they crack down on this?
THE Financial Conduct Authority (FCA) introduced new rules last year which said credit card lenders must contact struggling borrowers. If after 18 months the borrower has paid more in interest and fees than the sum borrowed — a situation known as “persistent debt” — the lender will ask them to increase their monthly repayments.
We call for regulators to take action on credit card debt and clamp down on them as they have with other rip-ff credit products[/caption]
After 36 months, if the borrower is still in persistent debt the provider should offer a reasonable way for them to pay it off in three to four years. If they can’t pay, lenders may reduce, waive or cancel any interest fees or charges.
Campaigners say these rules do not work as they assume borrowers can make more than the minimum repayments.
What should be done?
TWO separate campaigns spearheaded by the End the Debt Trap organisation and StepChange have called for cardholders to pay no more than double what they have borrowed. This cap has already been applied to payday loans in 2015 and rent-to-own firms last year, but the FCA has resisted pressure to apply it to credit cards.
- No credit card lender should charge interest greater than 100 per cent of the sum borrowed.
- The FCA should review its persistent debt rules and examine whether increases are genuinely affordable.
- Firms should not increase credit limits without borrowers’ permission.
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It says it would not be practical because credit cards are a form of revolving credit — meaning the amount borrowed and repaid constantly changes. But End the Debt Trap argues the FCA has not explained why a cap would be impractical, as the new rules already require lenders to compare the total interest and fees charged on a rolling basis with the sum borrowed.
Damon Gibbons, from the Centre for Responsible Credit, said: “Despite having the power to introduce a cap, the FCA has conducted no detailed assessment of this option.”
Vanquis Bank said it stopped offering credit cards with APRs higher than 59.9 per cent to new customers at the end of March. Existing customers who signed up before the change will be paying up to 79.93 per cent (under previous terms and conditions).
£12k debt in two years
DISABLED mum -of-four Alison Cairns, 58, ended up £12,000 in debt in just two years due to rip-off credit card rates.
She applied for five credit-building cards with rates of up to 49.9 per cent in case she needed the money in emergencies – but then made the mistake of spending on them.
At first, the cards each had a £500 limit. But soon lenders automatically extended that limit to £2,000. Alison says: “I know it’s stupid but because the money was there, I just kept using it to help me with everyday spending.”
Just 18 months after taking out her first card, Alison, from Fife, was unable to meet even the minimum repayments.
Alison, who is not able to work due to severe arthritis, says: “I could barely leave the house. I’d sit there thinking, ‘How am I going to fix this?’”
Alison asked her lenders to reduce the minimum payments to £50 a month. But only one replied, offering her a six-week payment “holiday”.
Desperate, she contacted StepChange, which helped her file for a minimal asset process (MAP) bankruptcy.
This process, only available in Scotland, wiped away her debts which she would never have been able to pay off.
Now debt-free, Alison has promised she will “never go near a credit card again”.
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