Sunday, February 5, 2023

Credit Card Companies Deliberately Piling on Debt, Says UK Group

Credit Card Companies Deliberately Piling on Debt, Says UK Group

Credit Card companies in the U.K. are deliberately increasing debt burdens on people struggling financially, according to an advocacy group. It found unrequested credit limit increases are higher among that demographic than the general public.

Also read: LakeBanker CEO: China Is a Great Place for Financial Innovation Like This

Charity network Citizens Advice claimed 18 percent of people already battling debt saw their credit limits automatically raised, according to a BBC report. That’s compared to 12 percent of the general public.

People in the U.K. are also using credit and debit cards more. Total transactions rose by 12 percent over the past year, while the value of spending rose by 7.2 percent. However average household incomes have only grown by 2.3 percent in that time.

That’s probably not surprising, as the developed world is doing everything it can to create a cashless society. There’s also a big difference between using a debit card and putting something on credit. The problem is ever-mounting consumer debt, which has the potential to cripple the economy.

Government Also Concerned at Rising Debt

Debt no moneyEven the government has expressed concern over this problem. Local regulator the Financial Conduct Authority (FCA) said in April that 3.3 million British people are in “persistent debt” — which means people who’ve paid more in interest and charges than repayments on the borrowed amount over an 18 month period.

As long as they continue making payments, struggling debtors are actually more profitable for credit companies than stable and responsible ones. This explains why that market sees its credit limits increased at a higher rate than others.

Both the FCA and the Bank of England’s Prudential Regulation Authority (PRA) want to put a stop to this. The FCA has proposed new rules aimed at getting people out of persistent debt situations — ordering credit providers to assist by suspending credit or creating more realistic repayment plans.

Meanwhile the PRA has given banks and credit companies (covering cards, car and other personal loans) a September deadline to prove they’re taking action to mitigate risks from bad loans.

When Debt Grows Out of Control for Everyone

Whether at government or individual spending level, debt drives the global economy. That’s all well and good when the economy is chugging along and debtors can make repayments. But it’s catastrophic when the machine stops dead, and everyone rushes to claim what they’re owed at once.

US dollars cashThis is exactly what happened in 2007-08. After years of reckless lending to unreliable markets and repackaging the debt to sell to others, large financial institutions realized they were under water themselves. Banks in both the U.S. and U.K. survived only with billions of dollars worth of taxpayer-funded bailouts. Some didn’t survive at all.

Needless to say, the U.K. authorities are wary of such a situation developing again. Credit cards may not seem like a huge problem now, but they could easily become one.

However governments themselves aren’t setting the best example, borrowing ever more to fund wars, programs and promises. The U.S. national debt (at all levels of government) stands at $23.4 trillion USD. Japan’s gross government debt is almost 238 percent of the country’s GDP. Greece is trapped in a long-term debt spiral. The numbers are so high as to be meaningless to the average person.

Credit cards sometimes seem determined to make debt meaningless to consumers too. Unfortunately, that’s profitable — for a while anyway.

How should we make people understand debt better? Let’s hear your thoughts.

Images via Pixabay

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