Britons turning to hugely expensive credit cards


High interest cardsFigures released recently by the Bank of England suggest that Britons owed a combined £61.5bn to credit card companies as of January 2010, representing a 15% increase from the equivalent period 12 months earlier. However, a worrying new report has revealed that some families are now turning to credit cards with huge interest rates as they struggle to secure finance from high-street banks.

Living on credit
Credit firm Provident Financial claimed that it is receiving more than 2,700 applications per day for its Vanquis credit card, which is designed for borrowers with poor credit histories or those who have had applications rejected elsewhere. The subprime card has an average rate of 39.9% but this can rise to 59.9% in the worst scenarios. Banking specialists Defaqto calculated that anyone with a Vanquis card with a balance of £500, making minimum payments only, would end up paying £1,108 in interest as well as taking 11 years to clear their debt.

Pushed to the edge
Provident is actively aiming to provide credit for consumers who will now be rejected by mainstream lenders if they are viewed as likely to miss any repayments. But despite already having 426,000 customers, the firm revealed that it has still been forced to turn away about 830,000 applicants. Chris Tapp, director of debt charity Credit Action, believes that this type of trend raises major concerns that desperate Britons will be tempted to seek emergency loans at rates of up to 3,000%.

"These people are not being served by the high-street banks, and it just goes to show the appetite that there still is out there for credit," he commented.

"The rates on these cards are very high if you cannot manage your debts. The fear is that while some of these people will hopefully have been put off, many will have to turn to doorstep lenders or payday loan companies that can charge exceptionally high amounts."

Very toxic debt
The devastating impact of the recession has seemingly created a catch-22 situation, with consumers desperately seeking credit but lenders becoming increasingly reluctant to oblige. Conservative member Lord Marlesford claimed recently that providers are also handcuffed by the debts they have already acquired over the years from their customers, which are now "very toxic" and unlikely to ever be paid off in some instances.

On the flipside, former Treasury minister Lord Higgins told the Daily Mail that recent credit card interest rate hikes are "unjustified" because companies are enjoying access to extremely cheap capital. It seems that, for the near future at least, consumers' best bet is to choose any new credit cards wisely and ensure they do not over-leverage themselves with their spending.

Published: 10 March 2010