'Subprime' credit cards are exacerbating debt problems for financially vulnerable people
Thousands of consumers taking out high interest so-called 'subprime' credit cards are ending up caught in a “expensive debt cycle”, debt charity StepChange is warning.
Around four million people in the UK have a subprime credit card - defined as cards with an interest rate APR of 30% to 70%.
Such cards tend to be offered by high street and specialist lenders to people with low incomes, unemployed, or who have an impaired or thin credit file.
StepChange has found that for 79% of its clients having a subprime card has made their financial situation worse.
Around a third of people with serious problem debt have a subprime credit card. Many people are already experiencing financial difficulty at the time they take out a card.
Some 18% said they were unemployed when they took a card, while 47% said they were already in arrears.
Two-thirds (68%) of StepChange clients with subprime cards said they had used more credit than they expected, driven primarily by resorting to “desperation credit”.
Subprime credit cards have a comparatively low cost of borrowing if paid off promptly.
For example, borrowing £500 and repaying it over three months at an APR of 35% would cost £25 in interest payments – cheaper than the typical high cost short term credit alternatives (such as payday loans) of around £140 to £260.
However, StepChange says the problem is that subprime cards are not always used as short-term borrowing facilities.
StepChange chief executive, Phil Andrew, says: "Our research points to a vicious circle. If you’re in debt you’re quite likely to take out a subprime card. If you have a sub-prime card it’s quite likely to exacerbate your debt.”
The charity is calling on the Financial Conduct Authority (FCA) for more regulation of the subprime credit card sector by ending the use of unsolicited credit limit increases and suspending interest charges for consumers in persistent debt.
It also wants the minimum balance payment level to be at least 3% on new cards.
Mr Andrew says: "The fundamental design and operation of subprime cards needs to change, and that’s why we’re calling on the FCA to take targeted steps on subprime cards.
"If people are stretched, financially vulnerable, and sometimes desperate, then of course they’re going to turn to whatever short-term means are available to help them cope. Yet far from being a lifeline, subprime cards currently are often a very expensive debt trap in the long term – sometimes far exceeding the costs of payday loans."
Reducing your debt
Setting a budget is often the first step to help you get on top of your finances.
Knowing how much you have coming in every month and what you need to spend helps you work out the best way to deal with your debts.
Some debts are more important to deal with than others, so make sure you prioritise those first.
Although credit card interest might be higher than your mortgage, missing mortgage payments can have more serious consequences as you could lose your home.
Credit card debt can be expensive, so it makes sense to pay this off as quickly as possible.
Council tax is another important bill to keep on top of. You could be sent to prison for up to three months if you fail to pay it.
Balance transfer cards allow you to consolidate all your debt in one manageable payment. Transferring over to a credit card that offers 0% interest on purchases can make debt repayments easier.
Some of the best deals will allow you to borrow for more than two years, giving you extra breathing space to pay off your debt.
If you are worried about debt you should seek help from a debt advice charity such as Citizens Advice, StepChange or National Debtline.
For more, read our guide to how to get out of debt in 2019.
Ban Subprime Cards
Subprime credit cards should be banned. Credit cards can be a good thing even for those on low income as they can be used as a constant short term bank loan but should be paid off each month otherwise it is the start of a debt spiral, if not paid back card should be frozen until fully repaid. Failure to pay back as agreed on time should ban you from any form of credit for at least 5 years then only low specially restricted credit until you prove yourself. People should learn to live within their means and realise that rent, council tax and utilities should be paid before other things.