Credit Increasing for Indebted Consumers, Citizens Advice Warns

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More people in debt have seen their credit card limits increased compared to those whose accounts are in credit, Citizens Advice has warned.

According to their research, 18% of debt-laden consumers have had their credit limits automatically increased without their consent. This is compared to the overall average of 12% – with the regulator estimating that 3.3 million UK consumers find themselves living in perpetual debt.

One of the main issues is that credit card lenders are engaging in limited or poor affordability checks – i.e. ensuring consumers are able to repay their debts. Indeed, many borrowers often feel that there’s no real limit to what they can spend on credit.

And that’s a problem, says Citizens Advice, who are now seeking a ban on financial institutions increasing such limits without the explicit consent of account holders.

Gillian Guy, Citizens Advice’s Chief Executive, said:

‘It is 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. The regulator must ensure that lenders are taking into account people’s whole financial and personal situation before agreeing further credit. Banning firms from raising existing customers’ credit limits without seeking their express permission first would also help people take more control over their finances.’

The news follows a report from the Financial Conduct Authority published earlier this year, which showed that ‘customers in persistent debt are profitable for credit card firms, who do not routinely intervene to help them.’ This comes at a time of increased borrowing, with June seeing a 12% increase on consumer spending on credit.

Defending the current practices of offering credit to those with no real means to pay back their debts, the financial industry’s body, UK Finance said:

‘Helping customers struggling with persistent credit card debt is a priority for our members. The industry has already developed a number of proposals to address the regulator’s concerns and ensure that no customer in persistent debt will be offered a credit limit increase. Where customers are in financial difficulty, the industry introduced a breathing space to allow customers to engage with a debt advice provider.’

Our reliance on credit, and credit companies’ willingness to extend limits and lending without the proper checks, has also been troubling the Bank of England, who fear that increased and unsustainable credit lending risks another financial meltdown. They have already warned companies to remain vigilant over the amount they’re willing to lend consumers, while the Financial Conduct Authority has suggested that companies should consider reducing or eliminating the unauthorised credit limits increases.

Two questions remain, however. Is a ban required, as recommended by Citizens Advice, or are lenders prepared to help indebted consumers without enforcement? And is the Bank of England’s suggested ‘vigilance’ an adequate replacement for stringent credit and affordability checks for those already in debt?

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