Katie Evans, Head of Research and Policy, Money and Mental Health

Circling the drain - why stronger action on credit cards is needed

Millions of us use credit cards every single day. They help us smooth the costs of big buys like furniture or a holiday, and offer rewards like air miles with them. Some users pay the bill every month, and never pay any interest at all.

But, at around 19% a year, interest on credit cards isn’t cheap. If only the minimum repayment is made each month, it’s possible for a customer to take decades to pay back just a couple of thousand pounds. With interest and fees, customers can end up paying back more than twice as much as they originally borrowed.

These debts can dog a household for years, long after the items purchased on the card are past their usefulness. Being in credit card debt can feel like circling a drain – never paying much more than interest, stuck in a loop with the debt hanging over you, not getting any smaller, using all your effort just to stay out of the black hole at the bottom..

“Over the last four years, while experiencing anxiety and depression, I have racked up £30,000 in debt on credit cards and a personal loan. As I have continued to be employed full-time it has not ever got to a stage where I couldn’t make my minimum payments. However it is very distressing to me that I cannot significantly decrease the debt. As a result, I continue to spend to make myself feel better. It is a vicious cycle that continues to affect my full recovery. I want to get out of the cycle and become debt free but it feels like an impossible mountain to climb.”

As long as the customer doesn’t stop making the minimum payment, these cards are still profitable for providers and there’s nothing to discourage firms from offering credit cards to people who might struggle to pay back more than the minimum.

Paying over the odds

People experiencing mental health problems are more than three times as likely to be in arrears on credit card payments than those without mental health problems. Our recent research exploring how experiencing a mental health problem influences our financial capability offers some insights into why this is the case. Common mental health problems can make it harder to solve complicated problems – for example, working out how much credit card debt is costing over a long period of time, and how much more than the minimum you can afford to pay. If this means people with mental health problems are more likely to just pay back the minimum balance on their statement each month, over years they could end up paying thousands of pounds in unnecessary interest charges.

I have very poor impulse control which is made worse by periods of depression and I’m often unable to weigh up financial decisions at the time. My inability to plan means that my credit buffer is always getting smaller and I am never making more than minimum payments.”

Pulling the plug?

New regulations proposed by the Financial Conduct Authority offer some ways to help consumers avoid the drain of persistent credit card debt.

  • When a customer has spent 18 months paying more in interest and fees than towards repaying their debt, firms will have to encourage them to make higher repayments if they can afford to do so, reducing the cost of the debt over the life of the loan.
  • If the customer is still in the same position 18 months later, firms must take bigger steps, like putting together a repayment plan to help customers pay off the debt more quickly.
  • Where customers simply can’t afford to repay any more quickly, credit card providers will be forced to help, for example by reducing interest.

Together, these changes should help avoid problems where consumers end up spending decades paying back far more than they ever borrowed on a credit card.

Going far enough?

These new regulations could help the millions of consumers across the UK struggling to pay off credit card debt. However, they won’t reduce the number of people getting into problems in the first place. Money and Mental Health has heard from dozens of people who have racked up tens of thousands of pounds of debt, often on credit cards, while experiencing serious mental health problems. Many of these people have told us that what they would really like is a way to exclude themselves from taking out credit at all. At the moment, there’s no foolproof way to do this. This week’s announcements from the FCA are a good first step towards making the credit card market safer for consumers. But we need to make sure that people who don’t want to be able to use credit, but who know that this impulse is hard to resist when they are unwell, are able to protect themselves too.