UK plan for credit cards

By Eamon Quinn

A UK watchdog may recommend removing minimum repayments from credit card statements because it feels it encourages users to build up debt at expensive costs.

The Financial Conduct Authority said that it is considering to ‘de-anchor’ the minimum repayment to encourage more people to pay more than the minimum repayments and to stop using credit cards for long-term borrowing.

It made the proposals after carrying out research on the way consumers use credit cards.

“Given the effects we observed during our testing, we are considering consulting on changing our rules and guidance to mandate the removal of the minimum repayment anchor,” the authority said.

“We consider a de-anchoring measure has the potential to increase consumers’ credit card repayments where they can afford to do so while preserving the flexibility of credit cards, which millions of consumers value,” the watchdog said.

It said academic studies had previously showed credit card users’ decisions on how much to pay back can be “disproportionately influenced” by statements of repayment amounts.

“This results in some consumers being more likely to make minimum repayments or repayments close to the minimum.

“This means they can end up paying more in debt service costs and taking longer to repay their credit card debt than they need to. While their debt may not yet be problematic, it is more expensive than it needs to be and there is some risk that it may become problematic in the future, for example, in the event of an income shock,” the authority said.

Its testing included offering increased minimum repayments on direct debits but it found “it didn’t increase overall payment amounts” because users in manual repayments subsequently paid back less.

Providing graphics on statements to display options to repay all debt “had no effect at all on manual repayments”, it said.

Instead, its research “found removing the minimum repayment amount from the manual repayment screen (de-anchoring) had a dramatic positive effect, significantly increasing the value of repayments made”.

The watchdog said that it doesn’t plan to increase minimum repayments because it is “keen to preserve flexibility for those who cannot afford higher repayments”.

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