Labour’s plans for capping interest on credit card debt
Bev Budsworth, MD of The Debt Advisor was invited to chat today on Radio 5 Live about Labour’s plans for capping interest on credit card debt.
Labour are clearly looking to grab headlines in advance of their annual conference. During an interview with Robert Peston in Brighton yesterday Sunday 24 September 2017, John McDonnell said he will announce plans to help the more than 3 million people in Britain who are paying far more in interest payments than they borrowed.
Under the proposals there would be a total cap, meaning people would not have to pay back more than twice the amount of their credit card borrowings. He is proposing that Labour would bring the regulation of the credit card industry into line with rules on payday loan companies, which were subjected to these restrictions from 2015.
McDonnell said he was “calling upon the government to act now apply the same rules on payday loans to credit card debt”.
“It means that no one will ever pay more in interest than their original loan,” he will say. “If the Tories refuse to act, I can announce today that the next Labour government will amend the law.”
FCA Plans to deal with 3 million individuals trapped in credit card debt
The FCA announced earlier in the year a consultation with the credit industry on a series of steps aimed at saving lenders Billions of pounds of interest over the next decade. This included:-
- Prompts by lenders to increase payments of those who have persistently paid minimum payments for 18 months. This would only be if affordable
- If still in debt after 18 months, lenders would be obliged to take steps including proposing repayments plans.
- Customers who do not respond would have their cards suspended
- For those who could not afford to increase their payments, lenders would have to help them by reducing, waiving or cancelling charges.
By 2030 the FCA expects these measures to lead to savings for customers of between £3BN and £13BN depending on responses of lenders.
Is credit card debt a major problem?
The total owed on credit cards in steadily increasing. The total has increased from £67.6BN in May 2017 to £68.7BN in July 2017. In the 2nd quarter of 2017, £386Million of credit card debt was written off. This would increase to £1.5BN per year and still the total owed is increasing.
FCA and Industries views on Labour Plans
It is early days but thus far it is believe that the FCA and industry have concerns that capping the interest on credit cards the same was as payday loans will upset the economic balance and will end up with lenders exiting the market and credit becoming increasingly unavailable and more expensive.
However, there is major concern about the growth of consumer credit which covers personal loans, credit cards and borrowing for cars, is rising at just under 10% a year, at a time when wages are falling at 0.4% a year, taking inflation into account.
Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), said last week that he was concerned about the sheer number of people who need loans to make ends meet. He identified gig economy workers, who do not have guaranteed hours, as in special need of credit to smooth their incomes.
The Bank of England’s Financial Policy Committee warned on Monday that banks were “underestimating” the potential risks to their balance sheets from consumer debts that might never be re-paid in the event of an economic downturn.
It has highlighted longer interest-free periods on new credit cards, encouraging people to build up debts, as one of a number of developments that have contributed to a nearly 10% increase in unsecured lending at the end of last year.
The outcome of the consultation by the FCA on credit cards in due in Quarter 4 of 2017.
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