Read below my comment in The Times on the Citizen’s Advice findings of growing household debt due to reckless lending by banks and credit card companies:
A new report from Citizens Advice highlights some important and alarming findings. Strikingly, one in five people struggling with debt saw their credit card limit raised without asking for it, while the same figure for all credit card holders was just over one in ten. The only way to interpret this is as an attempt to boost profits, with credit card companies and banks making money on the backs of the financially vulnerable. This culture of recklessness cannot continue.
These are not the only examples of firms acting irresponsibly. Much attention has been given to payday loans, thanks to the brilliant campaign by my colleague Stella Creasy, which resulted in the government legislating for a cap on interest rates. The Financial Conduct Authority subsequently implemented this and – when reviewing it this summer – concluded that it had been successful in curbing the worst excesses of the payday lending industry. But there is a real risk that these problem debts will simply move elsewhere.
That is why I presented a bill in parliament in April to cap charges on unauthorised overdrafts which can severely exacerbate the financial difficulties of the worst off and push them into a spiral of debt. The banks made more than £1.2 billion from overdraft charges, mostly from financially vulnerable customers.
The payday loans cap has shown that action by the government and regulator can be successful, providing a real benefit to consumers. But the first line of responsibility must fall on firms to act in a way that ensures their customers’ woes do not worsen because of their search for profits. Lenders have a responsibility to provide support to customers to allow them clear their debts, rather than pushing them further into the red.
The growth in unsecured debt, up 10 per cent in the past year, speaks to a wider problem in our economy. Credit cards account for more than a third of the total £201 billion consumer debt and has been, along with car loans (personal contract purchase plans), a driver of consumer credit.
The government treats this growth in unsecured debt, and the growth in total household debt (including mortgages) with far too much complacency. Whilst they have pushed a mantra of living within our means, the Conservatives’ economic policy relies heavily on consumer spending to drive growth. This consumer spending is increasingly funded by personal debt. Total household debt peaked at 160 per cent of incomes in 2008. Over the next 8 years it declined to 140 per cent. Since early 2016 it has grown to 145 per cent, we are storing up huge risks of another economic crash as consumers can’t continually live beyond their means.
But the squeeze on income and rising inflation has made it increasingly difficult for households to save and for many borrowing is out of necessity, not choice. Our savings ratio is now at a record low, having fallen to just 1.7 per cent in the first quarter of this year, down from 3.3 per cent at the end of last year. A growing number of people are finding it more difficult to make ends meet and many are relying on debt to cover the cost of basic needs.
The government’s economic policies have helped push the burden of debt onto consumers. The banks and credit card companies have lapped it up. They have felt little obligation or incentive to help customers. It is not sustainable and action is needed. Making sure banks and credit card providers do not push people further into debt is, at the very least, a good start.