Banks and other financial firms are dragging thousands of people further into debt by quietly raising credit card limits without their knowledge, a leading charity has revealed.
StepChange Debt Charity estimates that 100,000 clients have seen their credit card limit increased without asking for it in 2015 and, as a result, 50,000 saw their debt problems get worse.
It’s calling on the Financial Conduct Authority, Britain’s financial watchdog, to ban the practice, arguing that credit limit increases must be something that people opt-in to. At present, credit card firms can raise the credit ceiling so long as they give customers a 30 day window in which to opt out.
The current system means that thousands of vulnerable consumers, including young people, are currently sleepwalking into higher credit balances that they cannot sustain, prolonging existing debt problems and sparking a crisis if their income drops. The problem is partly due to low minimum repayments, which lull customers into what the charity calls a “false sense of security”.
Mike O’Connor, chief executive of StepChange Debt Charity, says:
“Before taking out any form of credit, people need the opportunity to decide whether it is the right option for them and if they can afford it. When their credit limit is increased without asking, these key decisions are taken away from them and they face the risk of taking out credit they cannot afford, which can turn into costly, long term debt.
“Credit limit increases must become ‘opt in’ so people are not presented with credit that they did not ask for and did not objectively decide they could afford. Opting-in, combined with better identification of people who are struggling, would be a significant step towards ensuring that more people do not become trapped in long term debt.”
The key to avoiding credit card emergencies is to figure out a) what you need to borrow for b) how long and c) what you can realistically afford to pay back. The clearer you are about the need for credit, the better off you will be. I explore in further detail how financial firms exploit our psychology to prolong our debts in my book Spare Change. The anchor effect sees thousands of people opt for much lower minimum repayments than is truly desirable – all because your provider suggests a low number that subtly influences you.