Credit card providers 'should give us nudges'

credit cards mix©

CARD companies need to do more to help people with "persistent levels of debt", the Financial Conduct Authority (FCA) have said.

They point to the fact that card companies are quick to contact the "extremely unprofitable" people who default on card payments, but have little incentive to help those who are "just above default levels".

According to the watchdog's interim report into the credit card market, two million cardholders have persistent debts that they may be struggling to repay.

A further 1.6 million people are repeatedly only making minimum payments on their credit card debt, which leads to them taking longer to repay the debt, at a higher total cost.

The FCA's Christopher Woolard said that the "market could potentially work better" for the "significant minority" who are struggling with credit card debt.

Forewarned is forearmed

One way the FCA want to help prevent card debt building up is to give people reminders when their promotional offers are about to expire.

They've suggested something similar in regard to savings accounts, which often have promotional introductory interest rates of their own. In both cases we'd be given warning when the rate that benefits us is nearing its end.

In the case of the savings account, such a warning could prevent us ending up with a "zombie account" paying next to nothing.

Such a move could be even more beneficial if applied to credit cards, however.

It would give us time to shop around for a better deal before any outstanding balance begins to accrue interest - and at a vastly higher rate than we will have been paying before.

Warnings could also be given when people reach certain trigger points in their spending - for example, when they reach half their credit limit.

The FCA suggest such "proactive warnings" could take the form of "text alerts, mobile applications, and/or emails".

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Some banks are already using these techniques to help people manage their overdraft facilities.

HSBC and First Direct have been sending texts to their customers for the past year - primarily when they risk incurring charges for unauthorised overdrafts.

The results have been positive, with customers saving around £85 million in overdraft charges.

Overall, the FCA say that text alerts and mobile banking have reduced the amount of unarranged overdraft fees charged by banks by nearly a quarter (24%).

Getting real

One of the apparent trends in recent years has been a move towards buying on credit with no real idea of when, if ever, we're going to pay it off.

While an improving economic situation and a slight return in consumer confidence has seen the a possible revival of the concept of "card tarting", many of the FCA's suggestions involve attempts to get people to face the reality of their credit card debt.

Monthly card statements should show how long it will take us to repay the current balance based on differing repayment amounts, for example.

Our statements could also show how much money we could save if we paid off a bit more each month.

Catching them early

Strategies such as this might well help prevent us being falsely optimistic about our ability to repay, which is just one of the behavioural biases that can get us into debt trouble.

Some of this isn't entirely our fault - we simply can't account for washing machines failing unexpectedly, or other similar one-off bills.

But while the lucky or well prepared will be able to absorb that cost over the course of a few months, a large number of us simply don't have the inclination to plan for such events.

A couple of such occurrences in a row - or one big unexpected expense - and we can find ourselves in an increasingly uncomfortable situation.

The FCA say that card companies are required to routinely monitor their customers' accounts for signs that they are struggling to repay.

However, rather than simply collating this information, card companies should act on it for their customers' benefit.

As well as contacting us to find out if we're heading for financial difficulties, the FCA suggest card companies offer lower cost alternative credit "as a matter of course to those who appear to be building up problem debt".

Behavioural biases

There are behaviours that we can't pass off onto the card providers quite so easily though.

Among these is our tendency to view costs in different ways, depending on whether they're expressed as percentages or in monetary amounts.

Most of us tend to imagine a fee or charge expressed in percentage terms as smaller than we do when shown the same cost expressed as an actual amount expressed in pounds.

Say someone wants to make a balance transfer of £900, with a transfer fee of 1.5%, or a fee of £13.50. They're exactly the same deal, but we imagine the fee expressed in percentage terms to be smaller than the one expressed in cash terms.

The same kind of problem affects how we see minimum repayment amounts, expressed as they often are as percentages of the outstanding balance, rather than a minimum cash amount.

The other problem is that far too many of us also happily follow the lender's lead when they suggest how big a minimum repayment amount should be.

The FCA suggest that both of these problems could be dealt with, at least partially, if card companies provided a range of pre-set repayment options, perhaps linked to a target repayment time.

"This would help influence consumer choice on how much to repay and counteract the potential 'anchoring' effect of making the minimum repayment," they say.

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