FCA: consumers 'worn down' into taking credit
MOST consumers only take credit cards after having been "worn down by continual marketing", a Financial Conduct Authority (FCA) report released last week claims.
While some consumers did actively seek out credit cards, Jigsaw researchers commissioned by the FCA found, many only started borrowing as a result of "multiple, persistent, targeted direct mail sent by credit card companies".
"Very few [consumers] were able to articulate what it had been about the particular offer that had meant they had applied for it," the researchers said, "they had simply become worn down by the cumulative weight of the messaging."
The report concludes that consumers who only take out credit cards as a result of marketing pressure are often poorly informed about how their products work and how much they cost.
Participants in the study said they were confused about how a 0% promotion, like a balance transfer, was different from the standard interest free period, for example.
The FCA will likely use these findings to change or limit the way credit cards are advertised.
Irresponsible advertising: what could be banned?
The FCA has the power to ban adverts for credit that it thinks are misleading and can even make firms compensate consumers who have lost out as a result of unfair marketing or issue fines.
In practice, however, the regulator has rarely intervened on specific adverts and has instead limited itself to making sure that firms follow laws that regulate the way credit is advertised.
Since 2011, for example, all credit advertisers have had to conform to rules laid out in the Consumer Credit Directive.
Among many other things, the EU laws govern the font size advertisers must use to display APRs and how many applicants must be able to access an advertised interest rate (at least 51%).
This week's report could indicate that FCA is preparing to take a more hands on approach to credit advertising.
The regulator could, for example, become something like the Advertising Standards Authority (ASA), which bans individual adverts after considering complaints from consumers but rarely intervenes in credit card advertising.
It's more likely, however, that this week's report will trigger tougher guidelines for credit card providers on areas of concern.
Direct mail adverts, which are mentioned several times in the research, are likely to come under particular scrutiny and the regulator may also look at other ways to encourage consumers to shop around for credit products.
"You're pre-approved!" credit adverts have always been concerning, not least because, as we've covered elsewhere there's no such thing as a 'guaranteed' credit card.
The FCA report notes that many of their participants had taken out cards as a result of advertising after receiving pre-filled application forms which further strongly imply - wrongly - that the application process is just a formality.
This type of advertising made credit cards especially tempting for consumers with a low income or poor credit history who assumed that credit cards were out of their reach. "It was difficult for this group to resist the offer," the researchers say.
While the FCA are likely to focus on vulnerable consumers, however, credit card providers have also been criticised for encouraging credit card behaviour that could easily lead to higher cost borrowing in other groups.
So-called proactive promotions like this could be discouraged in favour of measures that encourage credit card users to shop around for the best deal.
Worryingly, this week's report found that very few consumers shop around when they're thinking about getting a credit card.
Rather than a 'funnel' approach, narrowing down the options to find the best deal, consumers tended to get tunnel vision. Once they decided they wanted a card they tended to latch on to one and decide quickly.
Many did compare and tended to do so based on one particular feature they wanted, typically: the interest rate; credit limit or the length of the 0% balance transfer period.
At the heart of these criticisms of advertising and shopping choices is a larger concern about how much value consumers are getting out of the credit card market, another area that the FCA will be looking into in the next few months.