FCA: 3.7% only make minimum credit card payments

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THE Financial Conduct Authority (FCA) is launching an investigation into how the UK's £1.5 billion credit card market protects the most vulnerable consumers.

The full scale competition review will be launched by the end of this year.

Speaking at an industry event earlier today, FCA Chief Executive Martin Wheatley said that many of the UK's 30 million credit cardholders are getting a raw deal.

It is an imperative for the consumer credit industry to take a step back in 2014 and consider, again, how it engages with consumers in vulnerable circumstances.
Martin Wheatley, FCA Chief Executive

3.7% of credit card users make only the minimum payments on their debt for twelve consecutive months, Wheatley pointed out.

The minimum amount credit cardholders must repay each month has been slowly declining over the past few years, potentially costing those that only make the smallest possible payment hundreds of pounds.

Part of the FCA review will focus on why consumers make poor decisions like these, including the role that "inertia, irrationality [and] lack of willpower" play, Wheatley said.

Minimum payment madness

When it comes to irrationality both on the part of consumers and credit card providers, only making the minimum payments is a good choice of example.

The UK's average credit card balance is around £1,905. Based on a minimum payment of the greater of 1% or £5 and assuming that the card wasn't used again, that debt would take 23 years and 1 month to repay in full using just the minimum payments and would cost £2,065 in interest.

Of course, that doesn't reflect how most people use their credit cards but it does illustrate just how expensive only paying the minimum can be, and the number that do just that is not insignificant.

More on minimums
Minimum payments: our guide

That 3.7% of credit cardholders only paying the minimum for a year is equivalent to a million people paying far too much to borrow.

A smaller proportion - 2.3% of cardholders, or 700,000 people - even continue making the minimum payments for another 24 months in total.

Moreover, minimum payments have been slowly decreasing over the past few years.

According to research released last month by Totallymoney, a credit card comparison website, the average minimum was 2.15% in 2010. Today it's 1.53%.

The decline in the average has likely been caused by a few big credit card providers who have chosen to take the minimum down to the greater of 1% of the balance plus interest, or £5. Barclaycard, Capital One and Santander all currently have that minimum repayment rule.

Some providers set the minimum a little higher - for example, American Express generally set it at the greater of 2% of the balance plus interest, or £25 and MBNA set theirs higher in 2011 - but it's still a fairly low amount.

FCA: credit cards should protect the vulnerable

While the potential to use credit cards poorly affects all cardholders it's especially troubling for vulnerable consumers: those who could fall into unmanageable debt.

Half of households in the lowest 10% of incomes spend 25% of their income of repaying debts, according to the Centre for Social Justice.

Credit cards play a prominent role in this everyday debt and are highly likely to be used by those with debt problems, too. 10% of StepChange clients have 5 or more credit card debts, a multiple debt problem that also applies to payday loans.

"It is an imperative for the consumer credit industry to take a step back in 2014 and consider, again, how it engages with consumers in vulnerable circumstances," Wheatley said in his speech today.

In the case of minimum payments that could mean giving consumers more information so that they can see how much only making the minimum payment is costing them or making it easier for consumers to set up direct debits to repay their whole card balance every month.

Or, taking a less behaviour focused approach, it could mean the regulator stepping in to ensure that minimum payments aren't set at such low rates as MPs have suggested before.

Although minimum payments are just a small part of this review, the difference between the two approaches shows the crossroads the FCA is at as it launches this investigation: will the carrot or the stick best regulate card providers and protect vulnerable consumers?

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