Over 14 million consumers in the UK are caught in the ‘poverty trap’ of credit cards, with more than £14billion paid in credit card interest every year; according to a new report.
A new report has labelled the UK credit card market as ‘broken’ as the cost of living crisis continues to push millions deeper into credit card poverty by postponing debt repayments while struggling to pay everyday bills.
The findings indicate that as many as 14 million customers could now be paying close to £1,000 in interest each every year.
Cardeo, a fintech that helps customers pay less interest on their credit cards, says its report further demonstrates that the UK credit card market is broken and needs urgent reform – with over 60 million credit cards in circulation in the UK.
Co-founder and chief executive, Gavin Shuker, warns that unless the Financial Conduct Authority (FCA) pushes major lenders to be much better at enabling customers to switch providers, customers will continue to suffer by paying more interest than they need to.
And he’s calling for customers to be given greater access to real-time data through open banking which would enable them to find products more suited to their needs and potentially reduce their debt.
Credits cards and the cost of living
“The credit card poverty trap is catching more people as they struggle with the rising cost of living”, Shuker said.
“It is no surprise that customers are neglecting to pay off high-interest credit cards especially when the system doesn’t encourage them but as their available income is squeezed, the reality is that paying off credit card debt more effectively becomes even more important.
“Our analysis suggests that as many as 14 million people could now be paying close to £1000 in interest every year – that’s storing up a huge debt problem for millions of people and the country as a whole.”
Cardeo launched its app last year, which combines open banking data with artificial intelligence to help people pay less interest with no fees enabling them to pay off their credit cards more quickly and reduce overall costs.
At almost 24 per cent, credit card annual percentage rates (APR) in the UK are the highest that they have been in years. Whilst interest rates on new consumer credit have been decreasing across Europe, they have gone up sharply in the UK.
“It is becoming increasingly clear that the UK credit card market as we know it is broken and needs fixing. If we don’t, then it’s the consumers who will continue to pay the price,” adds Shuker.
The data solution
The company has called for a number of measures to be introduced improve the situation.
“For example, data needs to be freely accessible and credit card providers know this. When customers miss a payment they are hit with penalty fees,” he continues. “Credit card rates can be high, so it’s all too easy to fall into the credit card trap.”
Almost 20 per cent of UK credit card customers missed a credit card in the first half of 2022 due to the rising cost of living, incurring overdue payment fees and interest charges while damaging their credit scores.
The UK credit card market is valued at £60billion per year of which £14billion is paid in interest annually by customers. The UK has the highest proportion of consumer credit in credit cards, around 35 per cent, in Europe.
The report also found that the main source of revenue from consumer credit — around 80 per cent in the case of the UK — is the interest paid by consumers on their outstanding balance.
And figures suggest that the level of switching between lenders could be as low as three per cent. The incentives for providers to do more are minimal in the absence of prescriptive regulation and effective enforcement.
Time for clarity
The report, which was launched in The House of Commons, shows that the credit card market in the UK continues to be opaque and conceals or makes hard-to-understand customer data that would be crucial to develop a repayment strategy or switch to an alternative form of finance.
The lack of available data about their own finances prevents customers who need it the most from switching to a better product and effectively refinancing their personal debt.
“This is clearly something that credit card companies either want or do little to encourage,” continues Shuker.
“We founded Cardeo to tackle this problem. Our app combines open banking data with artificial intelligence to beat the downward spiral. Our aim is that people pay less interest, no more fees, and are able to pay off their credit card borrowing.
“Innovations like open banking can help customers manage these forgotten credit cards as well as optimise the interest and charges they pay by facilitating the switch to better options with lower APRs. However, although there have been some significant achievements since its inception, like the five million open banking user milestone, it has not realised its full potential so far and significant changes to the retail banking landscape including credit cards have yet to materialise.”