Should there be affordability checks for credit cards?

Credit card issuers need to do more to help up to 1.6 million people struggling with their credit card debt and paying only the minimum amount each month, the Financial Conduct Authority (FCA) has said.

Following a year-long review, the regulator has concluded that the £60bn credit card market is working reasonably well for those who default on their loans and that there is effective competition in the sector. But it is concerned about those who only manage to keep their heads above water and who on average will take 10 years to pay off their debts, according to the Financial Times.

The FCA's report points out that the two million Brits who do default on repayments are extremely unprofitable to the card companies as statistics show they are unlikely to ever pay off their debts in full. The Daily Telegraph says banks "realise it is in their interest to write off the debts quickly". Those who pay the minimum consistently for years, however, are "particularly profitable customers".

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Other issues raised by the review include the 'zero per cent' balance transfer offers that offer a period of no interest on existing debt in order to tempt customers to switch to another card provider.

As a previous report by The Week points out, customers often have to pay a fee to transfer to another card. In addition, they often pay higher rates of interest on any new spending and risk being hit by a much higher rate of interest on their existing balance when the offer period comes to an end.

Such concerns could result in new rules for credit cards, which experts say may progress to the sort of stringent affordability checks now required in the mortgage market. This would require lenders to assess prospective customers' capacity to repay debt and review their ability to withstand an interest rate rise before offering them credit.

In the meantime, the FCA has suggested a range of measures to address the concerns raised. These include offering customers more progressive credit limits rather than large sums of credit up front, requiring banks to flag up the end of zero per cent offer periods, and demanding that banks do more to identify and support those who are struggling with repayments.