Sub-prime credit card users being caught in expensive debt trap, says charity

A clampdown on sub-prime credit cards which charge high interest rates is being urged by a charity, which warned some borrowers are caught in an “expensive debt trap”.

StepChange Debt Charity said people struggling with arrears may see such cards as a lifeline – but more than three-quarters (79%) of its clients with a sub-prime card said it had a detrimental effect on their financial situation.

The charity said such cards can have an APR (annual percentage rate) of between 30% and 70%.

Sub-prime credit cards tend to be targeted at people with low incomes, who are unemployed, or who have an impaired or thin credit file, the charity said.

Nearly a fifth (18%) of StepChange clients were unemployed when they took out a sub-prime credit card and 47% of clients who took out a card were already in financial 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”.

StepChange said sub-prime 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 – which can be cheaper than the typical high-cost short-term credit alternatives of around £140 to £260.

But StepChange said sub-prime cards are not always being used as short-term borrowing facilities.

Two-thirds (66%) of StepChange clients said they usually make minimum payments.

StepChange chief executive Phil Andrew said: “Our research points to a vicious circle.

“If you’re in debt you’re quite likely to take out a sub-prime card; if you have a sub-prime card it’s quite likely to exacerbate your debt.

“Given the strong link between sub-prime credit cards and problem debt, it’s time for the regulator to take specific action in this part of the credit card market.”

StepChange wants to see the minimum balance payment level increased to at least 3% on new cards.

Affordability assessment requirements should also be strengthened, it said.

The Financial Conduct Authority (FCA) has been clamping down on the high-cost credit sector, including capping the cost of payday loans.

Mr Andrew said: “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, sub-prime cards currently are often a very expensive debt trap in the long term – sometimes far exceeding the costs of payday loans.”

StepChange’s research included a survey of more than 5,300 adults as well as more than 500 clients.