Is it time to put a limit on the credit we get?

Feb 8 2005

Jessica Shaughnessy on the debate about lending

Daily Post

CREDIT card debts are crippling the country after reaching a record £60bn. In north Liverpool alone last year, the Citizens Advice Bureau dealt with nearly £2,200,000 of debt.

Banks and credit card companies continue to meet with condemnation because of irresponsible lending.

And recently, more and more cases have come to light where people have taken their own lives because their debts drove them to despair.

Now MPs across the country have demanded the industry looks at its confusing interest rate calculations, extortionate penalty charges and failure to stop customers falling into debt. A new report by the Treasury Select Committee says customers "deserve a better deal" and called on credit card issuers to encourage responsible borrowing.

The report says it is impossible for the public to compare credit card interest rates for value because companies use different calculations.

It says the current credit history data is inadequate and leads to debtors over-committing, and expressed concerns that payment protection insurances are mis-sold by staff chasing commissions.

The committee has called for honesty boxes - stating interest rates, charges and consequences of making only the minimum repayment - to be printed on statements.

Banks are refusing to reveal how much they earn each year from charging their customers penalties.

But are the companies ruthless in making money from vulnerable debtors? Or should individuals take responsibility for their own actions, no matter how ill-judged?

The Daily Post asks: Should there be a blanket limit on the amount of credit we can get?

The majority of people use cards to their advantage

NO SAYS Sandra Quinn, communications director, the Association of Payment Clearing Services

DO WE really want to go back to the time when we had to go to the bank manager, cap in hand, and beg whenever we needed to borrow money?

Or do we want to be able to enter into a contractual relationship as grown up people, able to make our own decisions and take the consequences for our actions?

About 18 months ago the industry became aware there was a growing concern that it was too easy to get credit.

We looked at a whole range of things such as providing more information and increasing transparency to empower customers, enabling them to make the best decisions.

As part of the process of applying for credit cards, the issuer looks at your ability to pay the money back, using the data they have available to them.

They look at your history and also how much credit you already have available to you.

It is true to say that the industry rejects more than a third of credit card applications.

It may be that one company decides an individual is too risky, but another company will do business with them. That is to be expected, it's a competitive industry.

When you are assessed, the issuer decides how much they would like to give you and then sets your limit at a lower level.

This is called Low and Grow. It is to make sure you act as the company expects a good customer to act. If all goes well, they will look at increasing the credit limit in 6-12 months.

This is done automatically, but the customer can opt out, just by calling their card issuer. They can also ask for their credit limit to be reduced. The industry wants people to feel it is a choice rather than something they have been given.

Credit cards are the form of credit used most frequently. And two thirds of the adult population have a credit card. We have, on average, two each.

The average amount outstanding at any one time is about £1,764. Divided between two cards that is less than £1,000.

At any one time, the average adult uses less than 30% of the credit available to them. It would be unnecessary to put a limit on the amount of credit we could have if most of us don't even use half of what is available to us at the moment.

More than half, about 54%, pay off their credit card bill in full every month.

The industry does not encourage people to just pay off their minimum repayments, even though that would result in a lot of interest.

If you didn't spend any more money on the card the bill would be repaid eventually, but that is not the point of credit cards.

They are short term borrowing devices which the majority of people use properly.

Recently, there has been a lot of hype about national debt hitting the trillions, but that can be misleading. The amount of that debt that is actually being paid back is never mentioned.

You hear about people in debt committing suicide
YES SAYS Pete Tyson, Financial Skills Adviser at North Liverpool's Citizens Advice Bureau

ONE of my clients was so worried about his debts, he went for a meeting with the manager at a bank, which shall remain anonymous.

He came out of the branch some time later with two more personal loans to add to his problems.

Another client had accrued £150,000 of debt with 52 credit cards. How on earth were they allowed to have that many in the first place?

I have dealt with an 18-year-old boy who was given a debit card and a £150 overdraft. Before long his dad accompanied him to an appointment with me, because he now had an overdraft of £4,000 and he didn't know how he was going to pay it back.

You could say these people were all responsible for their own actions, but on the other hand, how can the banks be so irresponsible?

There was a story in the national newspapers last month about a man who committed suicide because he couldn't pay his £130,000 debts. You here about this all to often now.

Too much credit can turn into a vicious circle and the one way to stop this happening would be for the banks to reduce the amount of credit one person can have.

But for this to happen there needs to be a major change in the way banks share and check information. Communication needs to radically improve.

They should be responsible for checking how many credit cards one person has and whether they have the income to meet the repayments.

People end up taking out credit cards to make repayments on their existing cards. They do this until they can't get any more.

It's not unusual for people to come into the Bureau with debts of up to £70,000. They are depressed and in tears.

Often the thing that is at the centre of downward spiral is the fear of what will happen to them.

They think if they don't take out another loan or credit card, the bailiffs will come and take their house, or they will be sent to jail.

But a lot of that is because they don't have the right information. The one thing I would say to anybody who is worried about their financial situation is don't get into any more debt. Come to the CAB or another agency where the advice is free.

We tell our clients to prioritise their debt. The most important thing is for them to to pay their mortgage or rent, food, gas, electric and council tax.

The others all come under the Consumers and Creditors Act and are non-priority debts, and we can negotiate repayments with their creditors.

Last year, the North Liverpool bureau dealt with £2,189,388 of debt and £275,470 was written off. That figure increases year on year.

The best thing we can do at the moment is educate vulnerable people. The CAB has been holding workshops across the area.

Meanwhile Liverpool City Council is proposing to cut the budget for voluntary services.

With fewer resources all we will be able to hope for is that the banks will take up more responsibility themselves.

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