Debt: Five ways lenders keep you owing

There has been a significant increase in debt, particularly among young people, according to the chief executive of the Financial Conduct Authority.

“There is a pronounced build-up of indebtedness,” said Andrew Bailey this week. “We should not think this is reckless borrowing. This is directed at essential living costs.”

The numbers back up his assertion, not least data published by the Insolvency Service that shows the number of 18 to 34 year-olds becoming insolvent is up by more than 31 per cent as costs such as rent soar.

But could some of this indebtedness is down to lenders encouraging their borrowers to stay in the red? After all, borrowers can be highly profitable – unless they are pushed over the edge and into insolvency.

Fortunately, a lot has been done to prevent lenders from actively encouraging debt with flippant advertising or debt-positive marketing. The FCA has limited the number of times a payday loan can be rolled over, for example, to prevent customers pushing back repayment until it becomes a debt mountain.

Lenders also have to be more up-front about the risks attached to borrowing.

However, there are still ways that lenders encourage their borrowers to stay in debt. Here are just a few:

They offer even more credit

Many lenders automatically extend the credit limit of their credit card customers and several charities have called for this to stop.

In fact, according to Citizens Advice research, those with problem debts are actually more likely to be offered more credit. Its research showed that 18 per cent of people struggling with debts had seen their credit limit increased automatically compared to just 12 per cent of people overall.

Customers who do not want their credit limit extended often have to ‘opt out’, meaning many do not get around to doing so or enter into further debt without really considering whether or not it is affordable. The charity has called for lenders to be banned from extending credit without explicit consent.

Citizens Advice chief executive Gillian Guy said: “Irresponsible offers of further credit are pushing people into long term debt cycles. Citizens Advice helps thousands of people each year with credit card problems - including those struggling with large debts on several different cards that will take them years to pay off.

“It’s clear that irresponsible behaviour by some lenders is making people’s debt situation worse - such as offering more credit when they already have thousands of pounds of unpaid debt.

They incentivise debt

While few banks these days offer novelty freebies such as popcorn makers to encourage credit card applications, retailers can still do the equivalent.

All too often there are big discounts or incentives offered to customers who sign up for a store card and spread the cost of their purchases. That discount might be a one-off event, meaning customers can feel pressured into spending more to make the most of it, particularly if they can take their time over repayments.

However, store card APRs are typically far higher than even credit card borrowing so this can be a costly saving.

And if it’s a retailer the cardholder visits regularly then the temptation to get further into the red will always be there.

They hook you in with offers you don’t get

Lenders have to follow quite strict rules about the rates they advertise. The headline rate that is shown on their promotional material has to be offered to at least 51 per cent of accepted borrowers – although they obviously don’t have to accept every application.

But that means they can’t advertise a rate that only a fraction of customers will get. However, credit card companies can do something else; they can advertise lengthy 0 per cent deals but withhold them from all but a few.

According to MoneySavingExpert, the 0 per cent credit card market is a “wild west”, with many applicants finding they are offered far less favourable deals.

For people who do need to borrow, 0 per cent deals can be amazingly helpful. The very best cards offer more than two years’ free of interest charges and some balance transfer cards offer even longer without paying any interest.

But, unlike with the headline APR, there’s no rule that forces lenders to provide the advertised 0 per cent deal to a certain proportion of its customers. For borrowers, repeated applications can damage their credit scores and so many will feel they have to accept whatever they are offered.

Martin Lewis, founder of MoneySavingExpert.com, said: “On the surface we’ve got the most competitive credit card market we’ve ever seen. New customer 0 per cent deals are now commonplace and the advertised lengths nearly double those of five years ago. Yet this has partially been achieved by lenders switching to ‘rate for risk’ 0 per cent deals – taking advantage of confusion, and playing fast and loose with people’s credit scores. This needs to stop.

“People rightly focus on these offers to choose their card. However, many are then rightly left angry that the deal they get isn’t close to the one advertised, yet they’re stuck with it.”

They allow unauthorised borrowing

Dipping into an unauthorised overdraft can be an expensive mistake for borrowers but a profitable one for the lenders involved.

There are many occasions where an overdraft is an essential part of budgeting over a month. However, some banks are allowing customers to go past their limit and then making a hefty profit when they do so.

Earlier this year an investigation why Which? revealed that some banks are charging several times the fees of payday lenders to borrow money, with some high street banks charging as much as £90 in costs for consumers using an unarranged overdraft of £100 for a period of 28 days.

Bailey has warned that “the nature and extent of the problems that we have found with unarranged overdrafts mean that maintaining the status quo is not an option”.

They normalise borrowing

Paying monthly for a car doesn’t feel like debt, it feels like a lease. However, it’s actually debt and it’s a booming trade, despite a recent slow-down.

Car finance has hugely expanded members of the Finance & Leasing Association (FLA) report that they lent £41bn for the purchase of new and used cars in 2016 alone.

However, while such borrowing in fact entails serious debt and has been the subject of warnings from the Bank of England governor Mark Carney, it has also become incredibly normal.

In fact, data from the FLA shows that more than 86 per cent of new car registrations last year were funded with credit from its members. Heavy car finance debt has become normal, like a monthly bill, when in fact it is still borrowing.