Credit card providers coming under scrutiny
FURTHER details have been announced of the investigation into whether the credit card market is working in the interests of its customers.
The Financial Conduct Authority (FCA) says the study, which will start next January, will look at issues surrounding competition, affordability and marketing.
It will also look into the complexity of the products on offer, and the fairness of their terms and conditions.
There are more than 30 million credit card holders in the UK - about 60% of the UK's adult population.
Between them, they have 59 million cards, with a total of £56.9 billion in outstanding debt - an average of £965 owed on each card.
With more than 200 different credit cards on the market, the FCA says many people have chosen their card or use it in a way that doesn't suit their needs.
It says many cards have a "complex combination" of features on top of the basic borrowed payment function - introductory rates, varying fees and interest rates, rewards and loyalty schemes, and balance transfers.
And despite serious competition for customers seeking 0% balance transfers and introductory offers, interest rates across the sector have been increasing steadily since 2009.
While some 61% of people with credit cards pay off the balance in full every month, the rest - known as "revolvers" - take more time to pay off their credit, if they ever do.
The FCA plans to focus on the issue of "revolving credit", looking at three main areas:
- How easy it is for people to find the card for their needs - looking at complexity, transparency, the fairness of terms, and shopping around and switching
- How card companies recover their costs across their different user groups
- Unaffordable credit card debt - how widespread it is, whether customers are "tempted" into over-borrowing and underpaying, and how much marketing works against the interests of consumers
A necessary evil
There's no doubt that credit cards are incredibly useful, giving people the flexibility to cope with emergencies and spread the cost of big purchases.
Holders who make a conscious decision to take out a credit card say the bigger unexpected expenses are often the trigger for that decision.
The UK Cards Association estimates that the average load on a credit card is about 25% of the actual credit limit for that account, which, it says, suggests people do indeed treat their cards as a financial safety net.
Many card holders say they find the extra purchase protection offered by credit cards reassuring, and they also like that they can "earn" rewards by using their cards more.
But note the use of the word "conscious" above. Most people say they resist getting a credit card for as long as possible before "caving in" - and taking what's offered rather than then shopping around for the best product for them.
And while many say they took out a credit card for a particular purpose, there is a common theme of the card becoming a "crutch", supporting everyday spending or a higher standard of living.
Spending without repaying
Direct mail and pre-filled credit card applications are common, and for many people with lower incomes, the implication that the company will accept them is enough to stop them looking further.
Citizens Advice say they deal with around 14,000 credit card problems every month, making it the second biggest debt issue they advise on.
"Credit cards can leave people dependent on debt," says the charity's Gillian Guy. "For people who seek help from us about serious debt problems, the average credit card debt is £6,000."
Meanwhile StepChange say around two thirds of their clients have credit card debts, and that by the time they reach the charity that average debt is £9,047.
Most people will occasionally make only the minimum repayment, but 1.1 million people paid only that much for 12 months or more - and 700,000 made no more than the minimum repayment for at least two years.
Once upon a time, this wouldn't have been possible - until 1976, the law forbade extended credit, meaning customers had to pay off their balance in full every month.
The FCA says credit card companies generate the most revenue from interest charged.
That means it's very likely that people who don't pay off the full amount every month are making up for the loss of revenue from those who do - and often at far higher cost than they expect.
It's reassuring, therefore, that the FCA says it will be looking very carefully at whether and why card providers offer unaffordable lending, and that one of its three main objectives is to "secure an appropriate degree of protection for consumers".