There are growing concerns over the extent of credit card debts, with research from StepChange Debt Charity finding that, rather than being used for short-term borrowing, credit cards are increasingly becoming long-term problems. As a result, the charity is calling on the industry regulator to commit to "substantial changes" to reverse the trend and help those struggling under the weight of debt.
The figures show that over 200,000 people contacted the charity for help with £1.7bn of credit card debt in the last year, with the average person owing nearly £8,500 to creditors – and in the last five years, they've helped people faced with a total of £8.6bn in debt.
The charity is therefore calling for urgent action to reduce the risk of credit cards becoming "long-term, costly products with high and potentially unsustainable balances", and believes that one option could be to reform minimum payments.
According to their analysis, even small reforms to minimum repayments could cut repayment periods on a £1,000 debt from 18 to three years, and could save consumers hundreds of pounds in the process. This comes alongside reports from the Financial Conduct Authority (FCA) which show that 1.6m people are only ever making the minimum repayments, and that at the current rate of repayments, there are around 5m credit cards that will take over a decade to clear.
Given the extent of the issue, and the potential improvements that can be made with only small reforms, the charity is calling on the FCA to create a package of measures "to make credit cards work better for people who fall into financial difficulty", as well as to help prevent people from falling into financial difficulty in the first place. This could include ways to bring down balances and ensure responsible lending, and specifically, to help reduce the number of people struggling with multiple credit cards.
In terms of reform to minimum repayment rules, the charity has outlined several options, including increasing minimum repayments from 1% of the balance (plus interest and fees to 2%), which could cut repayment terms by up to 7 years; fixing minimum repayments at a set amount, which could cut repayment terms by up to 13 years; or a combination of the two, which could see repayment terms reduce by up to 15 years.
These calculations are all based on a credit card balance of £1,000 on a typical APR of 18.9%, which would take around 18 years to clear the balance based on current minimum repayment levels (1% of the balance plus interest and fees). Small changes to the rules could therefore have a radical impact on credit card debts, and could cut repayment terms dramatically – as well as saving consumers up to £950 if the final option was chosen.
People can be drawn into a "false sense of security" by low minimum repayments, said Mike O'Connor, chief executive of StepChange Debt Charity, but only ever paying the minimum can turn what is meant to be a short-term product into a long-term (and costly) issue.
"As a result, their debts will last for many years and they may pay a very high price," he said. "We believe that minimum repayments are too low and must be set at a level that ensures both responsible lending and borrowing. Although our proposals would lead to consumers repaying at a higher rate in the short term, they will lead to significant savings over the lifetime of the debt and stop debts hanging around for years.
"This is now a real test for the FCA and to succeed, it must commit to direct action that will prevent credit cards from becoming long-term debts. With robust measures to tackle how these products work and eradicate the irresponsible lending that leads to multiple maxed-out cards, we can help those in financial difficulty recover and ensure that credit cards are used as the affordable, sustainable, short-term products they are meant to be."
While it's hoped that the potential reforms will make a difference, it could take a while before any changes are implemented, if at all. This is why, if you're already struggling with debt, you don't want to hang around – leaving debt issues unchecked will only make them worse, so it's time to take action.
If you've maxed out a credit card (or two), you may want to look into 0% interest balance transfer cards, which will allow you to repay your debts without interest adding to the problem. Alternatively, if you've got several debts hanging around, it could be worth consolidating with a low cost personal loan – this way, you'll have only one set repayment per month, and once the term of the loan comes to an end, you'll be completely debt-free.
However, if you're really struggling under the weight of debt and are finding it hard to make even the minimum repayments, make sure to speak to the experts before it gets out of hand. Read our guide to getting debt-free, and then talk to your lender to see if changes can be made to your repayment plan. If not, consider speaking to StepChange or Citizens Advice Bureau for extra help. There could be a number of routes you can take, so don't go it alone!
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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