Credit Card Holders Affordability Study (Jan 2006)

18 January 2006

LEND NOW… ASK QUESTIONS LATER

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88% OF CREDIT CARDHOLDERS DID NOT HAVE TO PROVE INCOME 95% DID NOT HAVE TO DEMONSTRATE ABILITY TO REPAY

Credit card companies setting credit limits in excess of annual income
UK consumers account for two-thirds of total credit card debt in EU¹
uSwitch.com joins Banking Code Standards Board with call for lending practices to be tightened up

A new study by independent price comparison website, uSwitch.com, highlights serious failures in the lending practices of UK banks when issuing credit cards. With UK credit card debt standing at £56.35 billion², and UK consumers accounting for two-thirds of total credit card debt in the whole of the EU, one of the most shocking statistics revealed by the survey is that nine out of ten credit card borrowers were issued cards without the lender carrying out any checks to verify that they could afford to repay the debt.

The study reveals that the majority of people (88 per cent) who successfully applied for a credit card during the last year were not asked for proof of their annual income beyond the figures stated on the application, and 95 per cent were not asked to show evidence of their outgoings in order to provide a true picture of affordability. This may help to explain why there are more credit cards in the UK than there are people³. Coming just a week after the Banking Code Standards Board (BCSB) announced that voluntary guidelines for the industry should be overhauled to improve the way loans and credit cards are sold to customers, the uSwitch.com study highlights the extent of the reforms needed to restore confidence in the lending practices of UK banks.

Despite many lenders failing to check whether their customers can afford to repay any future unsecured credit card debt, this did not prevent them from sending out 100 million unsolicited credit card application forms in the three months leading up to Christmas⁴, and giving many applicants sizeable credit limits. In some cases, the credit limit can be equal to or in excess of a borrower’s annual income. For example, out of the people surveyed who were earning between £10,000 and £20,000 p.a., six were given credit limits of between £8,000 and £10,000 –which could amount to 100 per cent of their annual salary. In one instance, a person earning less than £10,000 p.a. was given a credit limit of between £10,000 and £12,000 – more than their annual gross income.

uSwitch.com’s calculations show that this person would need to repay over one third of their monthly take home salary just to meet the minimum repayments on their debt⁵, and would take over 28 years to clear the balance whilst paying £8,600 in interest6. Other revelations from the study include:

One in three people earning between £10,000 and £20,000 p.a. are given credit limits of between £2,000 and £4,000 – up to 40 per cent of their salary
One in five people earning less than £10,000 are given credit limits of between £2,000 and £4,000 - more than 20 per cent of their salary
Of 18 people surveyed who were unemployed at the time, two were given credit limits of between £6,000 and £8,000
Two people surveyed with earnings between £10,000 and £20,000 p.a. were given credit limits of between £10,000 and £12,000 – which could amount to 120 per cent of their salary

Nick White, Head of Personal Finance at independent price comparison website, uSwitch.com, said: “As consumer debts escalate, there need to be clear measures in place to ensure providers are lending in a truly responsible manner. “The finding that only one in eight cardholders provided accurate salary or income details during the application process emphasises the significance of the lenders’ failure to conduct proper checks. We are particularly concerned that those applicants least likely to be truthful about their incomes are all from the most vulnerable groups, namely the self-employed, students, the unemployed, and those on low incomes. “It is time for the banks to put proper measures in place to protect borrowers from over-extending themselves financially.”

Keith Tondeur, Chief Executive at Credit Action, the national money education charity, commented: “These findings are simply alarming. Lenders need to ensure that figures given to them by potential borrowers are accurate - especially for those in the lower income bracket who are much more vulnerable should things go wrong and who may be desperate to borrow because of existing problems. “It is also vital that lenders strongly encourage all potential borrowers to work out their budgets to ensure that they can realistically afford to repay before going ahead. Asking a few simple questions at the outset would mean that much misery could be avoided."

The Banking Code Standards Board (BCSB) has found some serious failings in the affordability checking regime adopted by providers to approve credit cards and personal loans, and agreed at a Board meeting last week (11 January 2006) that existing guidelines relating to the way these products are sold should be tightened up. BCSB will be addressing several related issues, including banks failing to close credit cards where debts have been paid off using a consolidation loan, and banks granting loans to individuals based on joint household incomes without ensuring both spouses are aware of the debt. www.uswitch.com For more information visit www.uSwitch.com or call 0800 093 06 07

-ENDS-

For further information contact:

Nick White, uSwitch.com, on 020 7802 2984 or nickwhite@uswitch.com
Cristina Rebollo, uSwitch.com, on 020 7802 2958 or cristinarebollo@uswitch.com
Karen Brunskill, Lansons Communications, on 020 7294 3685 or karenb@lansons.com
Juliette Lambert, Lansons Communications, on 020 7294 3645 or juliettel@lansons.com

Notes to editors The research was carried out by Lansons Digital Media (LDM) for uSwitch.com on 6–11 January 2006 among 1,937 respondents, of which 749 had successfully applied for a credit card in the last year.

1 UK consumers account for two-thirds of total credit card debts in the EU. Source: The Independent, 3 January 2006

2 Total credit card debt in November 2005 was £56.35bn. Source: Credit Action (Debt Facts & Figures), 4 January 2006

3 At the end of 2004 there were 74.3m credit and charge cards in the UK compared with a population of approximately 59m people. Source: APACS

4 New cards achieve “top of the wallet” status. They are the most used cards and the most lucrative for lenders. Source: Credit Action (Debt Facts & Figures), 4 January 2006

5 Based upon monthly net income of £713.87 (tax code 489L) and average minimum monthly repayment of £250 (2.5%) on a £10,000 balance. Source: uSwitch.com, 18 January 2006.

6 Based on a £10,000 balance at an average credit card APR of 15.0% (01 January 2006) and repaying the greater of 2.5% or £5 each month, a total amount of £18,692.34 will be repayable over a period of 28 years 11 months. Source: uSwitch.com, 18 January 2006.

About uSwitch.com uSwitch.com is a free, impartial online and phone based comparison and switching service which helps consumers compare prices on gas, electricity, water, heating cover, home telephone, digital television, broadband, credit cards, personal loans, secured loans and current accounts. Our aim is to help customers take advantage of the best tariffs and services on offer from every supplier. The company has developed a calculator, which evaluates a number of factors including price, location, service and payment method, and help consumers find the best deal to suit their needs.

If they choose to, consumers can switch while they're online or phone customer services direct. The service is also available via telephone, fax and post. Consumers can call on 0800 093 06 07, fax 020 7233 5933 or write to Customer Services, uSwitch.com, 10th Floor, Portland House, Stag Place, London, SW1E 5BH , with their postcode and usage details. uSwitch.com is not a supplier but acts as an independent advisor, giving consumers an impartial view of what's on offer. Unlike traditional brokers, it compares prices from all energy suppliers, not just those it has a commercial relationship with.The service is based on the most up-to-date information provided by the supplier companies and industry regulators.

About Credit Action Credit Action is a national money education charity (registered Charity No. 1106941) established in 1994. Credit Action produces a range of resources that help everybody handle their money well. Credit Action operates at a national level through advocacy, collaboration and partnerships with various groups and companies as well as at a local level through a network of volunteers who play a vital and very varied range of roles. Credit Action tries to help as many people as possible avoid the pain of debt. However they also have very close links with the major debt counselling charity the Consumer Credit Counselling Service (Registered Charity No. 1016630), who provide all debt counselling and management services totally free. Their free Helpline number is 0800 138 1111.