50 years of credit card rip-offs

They’re touted as the ultimate lifestyle accessory, the route to financial freedom and spontaneous fulfilment. But this week’s 50th anniversary of the credit card is mired in criticism over unfair practices, ill-treated customers and interest rates that have no bearing on real life.

“Credit cards are the absolute embodiment of the age we live in,” says Dr Donncha Marron, a sociologist specialising in consumption and personal finance at Abertay University, who says attitudes toward debt have become increasingly liberalised over time: “This cultural shift reflects a more market-driven, consumer-focused economy that depends on people spending money.

“The state-led liberalisation in the 1980s saw an opening up of the market, meaning consumers could get their credit card from a big grocery chain rather than a bank, for instance. This has fed into a general acceptance of using credit. What is especially interesting about credit cards is how widely they have proliferated over time.”

In fact, by April this year there were more than 60 million credit cards in circulation, carrying a total debt of more than £64bn. Today, the British public makes approximately 6,000 credit card transactions every minute.

And while 60 per cent of users manage to pay off their balances every month, a recent investigation by the Financial Conduct Authority found that around two million cardholders were in arrears or had defaulted. Two million more had persistent levels of problem debt and another 1.6 million people were regularly making only minimum payments on their debt.

Separate research from Moneysupermarket.com suggests that a third of the population, around 19 million people, have been saddled with credit card debt for a decade or more.

And behind the balance transfer and new purchase deals, the cost of that debt is rising quickly. Crucially, despite the Bank of England base rate plummeting to a historic low rate of 0.5 per cent in March 2009 and staying there, the average credit card interest rate has soared from 15 per cent in 2006 to 22 per cent today.

“Credit cards have changed the way we spend. More than half of us now hold at least one and we rely on them more than our European neighbours,” says Mike O’Connor, chief executive of the debt charity StepChange. “Conceived as a short-term cash advance to save people carrying so much cash, they have now become a near-universal way to borrow.

“Although credit cards can be a cost-effective way to borrow, for many people they have become very expensive, long-term debts. Last year we helped more than 200,000 people with £1.7bn of credit card debt. The average credit card debt we see is now at £8,403, about half our clients’ average annual take-home pay, and there is a clear need for change.”

One of the calls for change is around unsolicited increases to credit limits – often by thousands of pounds overnight – including for those already struggling with problem debt. Together with other small changes, such as increasing or fixing minimum repayments, they could save people thousands of pounds in interest and take years off repayment periods, campaigners argue.

Until that happens, our credit card habits may be an indicator of more than just how comfortable we are with borrowing, not least because it is clear those on lower incomes typically have the greatest credit card debts as a proportion of that income. With some of the lowest average credit scores, they’ll pay the highest interest rates on their credit card debt.

Indeed, Dr Marron believes that while that consumer credit can be seen as a productive force for the advancement of modern society, it can also be “a symptom of a pervasive sense of abandonment of the individual from social protection”.

However, he adds: “We’re now starting to see an attempt to install financial capability at all levels. The public is, on the surface, being given new ways to manage themselves better as consumers – from personal financial planning strategy to credit score management websites.”

“The upcoming review of the market is a chance for the Financial Conduct Authority to reform credit cards so they work better for consumers, particularly those who find themselves in financial difficulty,” notes Mr O’Connor. “Strong action on credit cards can help ensure they are used as the affordable, short-term product they were designed to be.”