Vulnerable borrowers pushed into high cost debt

Thousands of vulnerable borrowers are being pushed into high cost debt through the use of ‘credit builder’ credit cards claims the debt charity StepChange.

The cards are designed to help people with poor credit scores, but many of them are being used to pay everyday living costs.

Sub-prime cards

Officially known as sub-prime cards, they are marketed to people with low incomes, or even unemployed, as a way of building up their credit score by making regular repayments.

But the StepChange research showed that while most people took out a card with the intention of using it that way many of them ended up using the cards for long term borrowing at interest rates of between 30% and 70%, plunging them into problem debt.

Vicious circle

Chief executive Phil Andrew said: “Our research points to a vicious circle. If you’re in debt you’re quite likely to take out a sub-prime card and if you have a sub-prime card it’s quite likely to exacerbate your debt.

“Given the strong link between sub-prime credit cards and problem debt, it’s time for the regulator to take specific action in this part of the credit card market.

“The fundamental design and operation of subprime cards needs to change, and that’s why we’re calling on the FCA to take targeted steps on subprime cards, such as increasing the minimum balance payment level to at least 3% on new cards.

£12,000 debt

Concerned about how easily sub-prime cards can be obtained, the charity report highlighted the case of a Scottish disabled mother of four who ended up with £12,000 worth of debt in just two years.

She had obtained five sub-prime cards and was paying 49.9% interest on their balances as opposed to the standard 19.9% of an ordinary credit card.

She revealed: “I was shocked I was accepted to be honest. I’d had hardly any credit before so I really didn’t think I’d be able to get a credit card.

Income

“My only income was my Personal Independence Payment (PIP) and Carer’s Allowance, which came to around £400 a month.

“It was fine at first as I’d make payments and pay them off within a few months. But then the leaflets started to come through the door, advertising other credit cards I’d be able to get.

I didn’t really need them but I thought, what if I might need the cash in an emergency in the future?”

Severe arthritis

Unable to work because of severe arthritis, she found the card providers automatically increased her £500 credit limit to £2,000 on each of her five cards.

Eventually she found her £400 a month benefits was being swallowed up by the spiralling card debts.

Everyday spending

She said: “I know it’s stupid, but because the money was there I just kept using it to help me with everyday spending.

“I also used it to pay for things that I’d not been expecting, like £700 for fixing my car.”
Phil Andrew commented: “If people are stretched, financially vulnerable and sometimes desperate, then of course they’re going to turn to whatever short-term means are available to help them cope.

“Yet far from being a lifeline, sub-prime cards currently are often a very expensive debt trap in the long term – sometimes far exceeding the costs of payday loans.”