How 'no-consequences' credit can lure you to debt

By Benjamin Salisbury

Banks and credit card providers use a variety of tactics to lure consumers into borrowing money with seemingly no consequences. They offer consumers lengthy interest-free periods on purchases and balance transfers, relaxed affordability checks and unrequested credit limit increases to encourage consumers to spend now and worry about the debt later.

This comes at a time when credit card and personal loan debt levels are rising at their fastest pace in a decade. The latest Bank of England statistics show that British households owe £182 billion in consumer debt, equivalent to £7,296 per household -- on top of mortgages. Credit card debt accounts for £64.3 billion of that debt.

The debt charity StepChange deals first-hand with the impact of "no consequence" borrowing and believes it is a major issue. "Our research shows 2.5 million people in the UK are already regularly using credit cards to get by, but often, large available credit balances and small minimum repayments can provide a false sense of security," Peter Tutton, head of policy at StepChange, said in an emailed response to questions. no-consequences-debt-trap

Long interest-free periods can lure consumers into pricey debt
Interest-free balance transfer periods on credit cards have reached record lengths, with a few issuers offering up to 40 months. Interest-free purchase periods are currently available for up to 27 months.

While these offers may seem alluring, many consumers end up breaking their interest-free offers by missing a payment or making a late payment. Alternatively, some consumers fail to pay off their balance before the interest-free period is up and end up paying interest anyway (a consequence of dragging the period out for so long - consumers can easily lose track of how many months they have left). In fact, the latter is one reason issuers can offer such lengthy interest-free deals and still make money -- representative APRs are generally about 18.9% or higher.

"Financial companies lure people into having ‘no consequences debt' by allowing consumers to carry a card balance month after month," says Maggie Baker, board member of the US Financial Therapy Association (FTA).  "Eventually there will be a price and a high one."

Some find raised credit limits stressful
Though issuers must, by law, inform cardholders of any changes to their account, including an increased credit limit, they do not need cardholders' permission to make the change.

"Our clients have told us that raising their credit card limits puts them under financial pressure," Baker says. "There should be an active and explicit opt-in for credit limit increases."

When an issuer provides a credit limit increase, all of a sudden, the consumer has extra funds on their credit card, which, Baker says, "is like saying, ‘This is free money,' and far from there being no consequences, it encourages consumers to spend money they don't have."

How to avoid the trap
One bank, RBS, has banned 0% cards, with chief executive Ross McEwan stating, "We will not be in the business of trapping people in debts they cannot afford."

For those who aren't shielded from such tactics, your best route is to be sure to use your cards in a disciplined manner. This includes having a plan to pay off any hefty purchase or balance transfers that you put on a 0% interest card, and being sure to make at least minimum payments on time.

"With effective, robust measures to tackle how credit cards work and eradicate irresponsible lending, we can help people in financial difficulty to recover and ensure that credit cards are only used as the affordable, sustainable, short term products they are supposed to be," StepChange's Tutton says.

See related: With long 0% balance transfer deals, one strike, you're out, Dealing with an unwanted credit limit increase

Published: 26 May 2016