Context

About 30 million people in the UK have at least one credit card. The total outstanding balance of credit card debt in the UK amounts to £61 billion. A third (32.5%) of unsecured personal lending takes place through credit cards. In 2014 the Financial Conduct Authority, (FCA), became responsible for the regulation of consumer credit. Through this study the FCA sought to better understand the credit card market and whether it was meeting consumers’ interests.

The study

This study explored competition among credit card companies and implications for consumers, and considers possible solutions to emerging issues. The research is based on a dataset covering 80% of UK credit card accounts opened between January 2010 and January 2015, and information recorded when accounts were opened.

The study considered:

• To what extent consumers shop around and switch credit card companies, thus fostering competition;
• How providers recover costs from different consumer groups, and how this behaviour affects the market;
• To what extent consumers borrow more than they can repay, and whether there are incentives for credit card companies to promote unaffordable credit.

Key findings

Consumers appreciate the flexibility of credit cards; using them to build credit history, earn rewards, repay other debt, and gain emergency credit.

• Competition among credit card companies tends to focus on introductory offers, rather than comparing fees, charges and interest rates;
• High-risk clients have limited credit options as not all companies are willing to serve them;
• Around half of all consumers shop around before choosing a credit card and about 14% switch every year. Price comparison websites are a valuable tool, helping consumers to understand complex products. However price comparison websites can lack detail, reducing the ability of consumers to make an informed choice;
• Most credit card holders borrow small amounts. However, for those who borrow larger amounts, choosing a card with low interest rates could result in considerable savings. Additional advice and support to help consumers choose the best product would be beneficial.

• Credit card companies do not target specific groups of consumers to subsidise other groups;
• Most products are designed to at least break-even over five years, for all types of consumers;
• Firms make more profit from customers who borrow more. Consumers who tend to only make minimum payments are profitable, and firms have little incentive to encourage behaviour change among these clients;
• The newly introduced cap on interchange fees is likely to reduce companies’ income from the cap by 5 to 10%. Firms may respond to this by offering smaller rewards on their schemes or charging new or additional fees on other products.

• Customers who default are not profitable for credit card companies. Firms therefore tend to avoid lending to people who will ultimately not be able to repay debts. The study estimated that 6.9% of credit card holders were in arrears or had defaulted;
• However, 6.6% of cardholders have high levels of debt. These customers are profitable for companies. These customers may experience difficulties making repayments, but firms do not tend to intervene to address persistent debt, provided payments are being made;
• People who regularly repay the minimum required (5.2% of UK cardholders) are also profitable for companies. Although this group may not be struggling to repay, they may incur costs from taking longer to pay off their debt;
• Balance transfers do not contribute to credit card debt. Almost 50% of balance transfers were repaid in full by the end of the promotion, and 71% were repaid in full after six months;
• An analysis of credit cards opened after January 2010 showed that 1% paid more in service costs than the amount borrowed (problem debt). Furthermore, 8.9% will take more than 10 years to repay their credit card debt according to current patterns.

• Allowing consumers to consent to third parties (such as other credit card companies or price comparison websites) accessing their transaction history, may result in consumers making more informed comparisons;
• Price comparison websites should have clear standards to provide more accurate information;
• Firms could send reminders to consumers about expiring promotions, encouraging them to repay their debt or shop around;
• Promoting and facilitating quotation searches, enabling consumers with higher credit risk to shop around without affecting their credit score;
• Supporting customers by providing information in monthly statements about payment options, such as to increasing monthly amounts to repay more quickly;
• Sending warnings to consumers who are identified as at risk of incurring problem debt.

Points to consider

• • The study is relevant to credit card companies wishing to develop support options for customers experiencing, or at risk of, problem debt.