Increased credit card limits cause bigger problems

Major new research by the Citizens Advice service finds that nearly 1 in 5 people struggling with debts have had their credit card limit raised without them requesting it - a practice the charity would like to see banned.

After the Bank of England issued a warning to lenders about how they are granting credit to consumers, leading local advice charity, Citizens Advice Exeter, says poor affordability checks by firms are making people’s financial situation worse.  

Consumer borrowing has risen to over £200 billion and over a third of this - £67 billion - is on credit cards.

The charity’s research reveals that people struggling with long term credit card debt were more likely to have their limit raised. 18% of struggling credit card users had their limit raised in the past year without requesting it, compared to 12% of all credit card holders.

People with credit card debts were also more likely to get into long term debt than those with personal loans and were less able to pay their debt down.

Only 60% of people struggling with credit card debt were able to reduce it over two years, compared to 72% of people struggling with a personal loan - with credit card borrowers paying off £449 over two years, compared to a drop of £620 for people with personal loans.

Citizens Advice Exeter is also concerned that firms are not providing support early enough to people who, despite meeting the minimum repayments, are struggling with long term credit card debt.

The charity is calling for changes to protect people from falling into long term credit card debt, including:

• Firms being banned from raising people’s credit limits without obtaining their explicit consent to give people more protection against ever increasing debt.
• The Financial Conduct Authority to provide clear guidance to lenders stressing that before increasing a borrower’s limit, they must check their ability to repay it.

Citizens Advice Exeter helped people with over 400 credit card debt problems in the last year.

Citizens Advice Exeter Chief Executive, Steve Barriball, said:  “Irresponsible offers of further credit are pushing people into long term debt cycles.

“We help hundreds of people each year with credit card problems - including those struggling with large debts on several different cards that will take them years to pay off.

“It’s clear that irresponsible behaviour by some lenders is making people’s debt situation worse - such as offering more credit when they already have thousands of pounds of unpaid debt.

“The regulator must ensure that lenders are taking into account people’s whole financial and personal situation before agreeing further credit. Banning firms from raising existing customers’ credit limits without seeking their express permission first would also help people take more control over their finances.

“Lenders must act responsibly and direct people struggling with debt towards free and independent advice and support - rather than more credit.”

The FCA has announced a range of proposals to help those already in long term credit card debt - who are spending more on credit card interest charges than paying off the total amount they owe.  It says lenders should contact customers who have been in this situation for 3 years to arrange a plan to pay their outstanding balance more quickly.

Citizens Advice says lenders should be asked to intervene sooner - at the very latest after two years - to help people struggling with unaffordable debt.