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16.06.2017

Will Credit Card Debt Bite Back?

Throughout 2017, credit card debt has risen at a huge rate – with figures eclipsing the Bank of England’s already large estimations. Worryingly, this level of credit card borrowing has not been seen since the months leading up to the financial crash in 2008. The question is, how long can this borrowing continue before credit card debt bites back?

The bigger picture

Credit card debt becomes a looming issue when it’s viewed against the backdrop of an ailing economy; inflation is rising, wages remain motionless or capped and people are turning to credit to bridge the gaps.

These gaps are a troubling trend – the increasingly common picture is not one of reckless lavish spending on credit, but instead, large swathes of the population for whom a monthly wage does not last a month.

Attractive offers

When a wage falls short, promises of large opening balances and 0% interest appear to make sense – cheap borrowing that lifts the financial pressure. In a lot of instances, interest rates are at their lowest rate since records began in 1995. What’s more, card providers are increasing the period over which a 0% rate applies – with some offering almost 4 years without charge.

Financial experts believe these kinds of conditions encourage mismanagement of money and budgeting. It can certainly appear that card companies are the winners when money isn’t handled correctly – when repayments are missed or the 0% period ends, interest rates are often hiked to around 19% – and the companies start to make money.

False sense of security

Good-looking offers give the impression that the money being used comes at no cost – but this does not reflect the reality of credit card use for most people. Debt charity StepChange say there are 3.3million people who are in persistent credit card debt – meaning they have paid more in interest charges than they have toward the actual amount of money borrowed, normally over an 18-month period.

Of that 3.3 million, 650,000 have been in that ‘persistent credit card debt’ situation for over 3 years. Given how recently the boom in credit card spending has occurred – and the fact that a further 750,000 people only make the minimum repayments possible toward their credit card debt, the number of people struggling looks set to grow at an alarming rate as 2017 progresses.

Banking on your missed goals

Credit card companies do not operate on hunches or possibilities, decisions are made based on cold business statistics. If a credit card were used only during its 0% interest period the product would not be sustainable for lenders. The fact that credit cards with large periods of 0% do exist should be proof enough that lenders expect you to miscalculate – or entirely miss your plans of repayment during that window.

In doing so, you put money in the pockets of lenders – and the figures make for troublesome reading. For every £1 that is borrowed, an average of £2.50 is paid off. People balk at the astronomical interest rates that are quoted by short term lenders – but the truth is, when a credit card is handled in the way that a huge percentage of individuals handle them, the repayment rates can well exceed those of the short-term payday lenders. Suddenly a credit card is not such an attractive prospect.

The only option

While the reality of credit card use, interest rates and charges might not feel so appealing when viewed in the cold light of day – it’s sometimes the only place that people can turn when money runs out.

Consumer research suggests that 75% of credit card providers do not have a minimum income requirement for applicants, a requirement that would see an individual unable to take even the first steps toward credit anywhere else.

An area of concern

With a lot of the statistics that relate to on-going persistent debt coming straight from The Financial Conduct Authority (FCA), it comes as no surprise that they have flagged credit card borrowing as an area of concern. In April this year, the FCA published a consultation paper aimed at putting guidelines into place for credit providers to actively identify and support individuals who fit the persistent debt profile. Some persistent credit card users choose to clear their balances with further borrowed money, in the form of a Debt Consolidation Loan. This can lead to further interest payments in the long run.

Beyond encouraging the identification of customers with potentially damaging repayment habits, the FCA is targeting the ever-increasing credit limits that many providers grant their customers. Offering a customer more control will hand control back to the individual, rather than just being handed another pot of potentially expensive money to spend.

Where debt has continued to be a problem for a prolonged period of time, recommendations will include a reduction or writing-off of interest charges.

Debt means profit

The FCA’s intervention comes after an acknowledgement that credit companies quite simply do not have the best interest of borrowers at the heart of their business. While heavily regulated, credit companies are ultimately businesses – built to generate profit. In this case, profit grows as borrower’s debt worries increase.

What can we learn as borrowers?

It is important that borrowers do their best to look at the reality of any credit situation. Do you have the ability to pay off your credit card debt before the 0% period elapses? Furthermore, can you continue to support yourself and pay toward clearing this balance if anything unforeseen should happen?

It’s easy for people to talk in ideals and suggest that “if you can’t afford it, don’t buy it” – but that just does not represent what most borrowers are doing with their credit cards. Every year, 75% of people experience an unexpected large expense – and when they do, credit either pays for it – or repayments suffer as funds are redirected which in many occasions leads to someone having to seek debt help .

The date at which large interest rates kick-in might seem a long way off, but time passes quickly and debt can be on top of you if repayments haven’t gone exactly to plan. In this time of incredible financial pressure, job uncertainty and turbulent economic conditions, life plans being derailed is more likely than ever – and it’s only credit card companies that thrive when that happens.

If you need more information about the options available to you in dealing with your debt, you can always speak confidentially with one of our friendly advisors on 0808 2085 198.