Red card: Time to blow the final whistle on the sub-prime card debt trap

Around four million people have a sub-prime credit card (defined as cards with an interest rate APR of 30-70%). New research published by StepChange Debt Charity finds a strong association between sub-prime cards and problem debt – with three quarters (79%) of the charity’s clients with a sub-prime card saying it had a detrimental effect on their financial situation. This is at least partly attributable to the way firms market and operate the cards.

StepChange identifies targeted actions that the Financial Conduct Authority needs to take on sub-prime card practices – such as setting higher compulsory initial minimum payments on new cards, strengthening affordability assessment requirements, and banning unsolicited increases in credit limits – to reduce the likelihood of people getting unnecessarily caught in an expensive debt spiral.

Red Card: Sub-Prime Credit and Problem Debt, draws on national polling undertaken by YouGov, as well as a survey of StepChange clients [see notes 1 and 2 to editors]. It identifies a mismatch between how people anticipate using the cards and how they actually use them. Taking this together with the very high cost of using sub-prime cards for long-term borrowing, the end result is that people often find themselves stuck in a high cost debt trap.

StepChange CEO Phil Andrew says: “Our research points to a vicious circle. If you’re in debt you’re quite likely to take out a sub-prime card; 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 sub-prime cards needs to change, and that’s why we’re calling on the FCA to take targeted steps on sub-prime cards, such as increasing the minimum balance payment level to at least 3% on new cards. 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.”