£1.7bn credit card debt shows need for urgent action

9 March, 2016

StepChange Debt Charity is calling on the FCA to commit to substantial changes to credit cards amid concerns that, despite being designed for short-term borrowing, they have led to long term debts for millions of people.

New figures released today (March 9^th) by the charity reveal that over 200,000 people contacted it for help with £1.7bn of credit card debt in the last year alone, with the average person owing nearly £8,500. In the last five years, the charity has helped people struggling with £8.6bn on credit cards.

StepChange Debt Charity believes that urgent action is needed to reduce the risk of credit cards becoming long term, costly products with high and potentially unsustainable balances. One option is to reform minimum repayments. Analysis by the charity shows that small reforms to minimum repayments could cut repayment periods on a £1,000 debt from 18 to 3 years and save consumers hundreds of pounds.

The FCA itself has already reported that 1.6 million people are repeatedly making minimum repayments and that five million credit cards will take more than 10 years to clear at their current rate of repayments.

The charity is calling on the FCA to work with lenders and other stakeholders on a package of measures to make credit cards work better for people who fall into financial difficulty. It says the measures also need to help prevent people from falling into financial difficulty in the first place.

StepChange Debt Charity believes that the package should include measures that bring down balances, ensure responsible lending and reduce the number of people struggling with multiple credit cards.

Small changes to minimum repayments could have radical impact on credit card debts

In 2010, changes were made to credit cards to increase transparency and encourage people to pay them off quicker. StepChange Debt Charity believes these changes have made some difference, but a serious problem still remains and millions of people continue to struggle. It has put forward the following suggestions for consideration:

a)     Increase minimum repayments from 1% of the balance plus interest and fees to 2% - could cut repayment terms by up to 7 years

Currently, if a credit card was issued after 1st of April 2011, a minimum repayment must be at least 1% of the card’s balance plus any fees and interest. StepChange Debt Charity calculates that if someone repeatedly makes only minimum repayments on a credit card with a balance of £1,000 and an APR of 18.9%, it would take around 18 years to clear the balance.

The charity is suggesting that minimum repayments be increased to 2% of the balance plus interest and fees, rather than 1%. The minimum repayment would still reduce as the balance of the card went down, as it does now, but the time it would take to clear the balance could fall dramatically.

In the example of a card with a balance of £1,000, this would mean increasing the minimum repayment by around £10 each month from £24.71 to £34.85. This could reduce the repayment term to 11 years and save consumers around £600 in interest.

b)     Fixing minimum repayments - could cut repayment terms by up to 13 years

The charity says that if minimum repayments remained fixed and did not go down until the credit card balance was cleared, the repayment term could be cut even further. 

In the same example of the £1,000 balance, this would mean paying £24.71 each month until the balance was cleared. This could reduce the repayment term to 5 years and 2 months and save consumers around £730 in interest.

Both a) and b) Fixed repayments at 2% of the balance plus interest and fees – could cut repayments terms by up to 15 years

If the minimum repayment was increased from 1% to 2% and remained fixed at that cash amount (i.e. did not reduce until the balance of the card was cleared), it could cut up to 15 years off the repayment term.

For the same £1,000 balance, this would mean increasing the minimum repayment by around £10 each month from £24.71 to £34.85, where it would remain until the balance was cleared. This could reduce the repayment term to 3 years and 2 months and save consumers around £950 in interest.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said:

“Millions of people are making minimum repayments on their credit cards and as a result their debts will last for many years and they may pay a very high price.  People can be drawn into a false sense of security by low minimum repayments, but repeatedly making the minimum repayment on a credit card will turn what is meant to be a short term product into a long term and costly one.

“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.”

StepChange Debt Charity calculations

Credit card stats from StepChange Debt Charity

StepChange Debt Charity research shows that making continuous minimum repayments is a sign of financial difficulty and calculates that it could take someone more than 18 years to clear their balance if they never pay more than the minimum repayment

• Last year, StepChange Debt Charity dealt with nearly £1.7bn of credit card debt (£1,694,369,421), which represents 41% of the total amount of debt we see
• 31% of the individual debts we see are on credit cards, making them the most common type
• On average, clients with credit cards have outstanding balances of £8,403
• 66% of our clients have at least one credit card and 38% of that number have 3 or more
• Those with credit cards have an average of 2.5 credit cards

Credit card stats from UK Cards

As of 2014 (the most recent statistics available):

• There are 56.9 million credit cards in circulation
• There are 31.3 million card holders
• The average credit card holder has 1.94 credit cards

Previous Bank of England data has shown that the UK holds around 70% of the EU’s credit cards, with around three times as many as France and 14 times as many as Germany.

Notes to editors:

StepChange Debt Charity’s proposals on changes to minimum repayments are contained in its response to the Financial Conduct Authority credit card market study interim report.