Motion for leave to bring in a Bill (Standing Order No. 23)
I beg to move,
That leave be given to bring in a Bill to require credit card companies to discharge a debt when three times the equivalent of the principal sum owed has been paid in interest; and for connected purposes.
Payday lenders have rightly been the focus of a large amount of media attention, but I would now like to focus attention on to another form of borrowing, and on to the credit card companies that cause detriment to an even larger number of people. The aim of the Bill is to limit the total amount of interest paid on credit card borrowing and so prevent debts from spiralling upwards and out of control.
Credit cards, though undeniably useful and convenient, are a major cause of agony for many of my constituents, particularly those struggling with everyday finances. Research commissioned by StepChange—the new name for the Consumer Credit Counselling Service—suggests that at least 3 million households are in financial difficulty, with a further 3 million at risk. It further suggests—I do not disagree—that credit cards play a significant part in those people’s predicament.
The number of people seeking help with credit card debt has risen sharply in the past five years. It was already high back then, but the recession has seen it rise even further. Whereas people previously used credit cards for luxury or exceptional purchases, many are now using them simply to make ends meet, as well as committing to further credit card borrowing when one card is maxed out, in order to plug the gap in their household finances. Multiple credit card debt is now a feature of life in the 21st century and it figures disproportionately in many debt problems. Using one credit card to pay off another results in a vicious cycle of increasing debt, as interest and other charges are added to the initial capital sum. This can lead to a real sense of hopelessness and despair, as the balance hardly reduces over time.
The situation has not gone completely unnoticed, however, and there has been some effort to address the issue. The Office of Fair Trading, for example, has published guidance on irresponsible lending, calling on lenders to take action when a borrower fails to make minimum repayments or when he or she is paying off credit card debt by using another credit card. The lending code that was agreed in 2010 included a commitment not to increase credit limits when there was evidence of the borrower being in financial difficulties, and a requirement to ensure that the minimum repayment included at least 1% of the balance owed. However, I recently looked at the example of a Lloyds card that had £1,000 on it. It would take 17 years and nine months to pay down that amount using minimum repayment levels. So the measures in the lending code are not enough, certainly for today’s borrowers who are already in debt and whose debts are growing. That is why I am proposing a cap on credit card debt. Such a cap could help borrowers now.
My Bill would place the cap at three times the original sum borrowed, after which there would be no liability to pay. That would effectively limit the amount by which creditors could increase the size of a debt by the addition of interest and charges when people were struggling. This is not about letting people off lightly or allowing them to default on their debts. Credit card companies would still get their profits. It is about giving people a guarantee that their debt would be paid off at some definite future date and that it would not spiral upwards. The measure would also send a message to lenders that they had to take their responsibilities towards struggling customers more seriously.
Yes, some technical matters would need to be ironed out, and the maths is not simple—the interest rate would clearly affect the time it would take to build up three times the initial capital, for example—but it is important that something should be done to prevent people from falling into a high-cost credit trap. The distinctive feature of credit cards is that minimum monthly payments reduce the outstanding balance by only a very small amount. That is why they are such a poor way to borrow. The 1% rule encapsulated in the lending code agreement of 2010 was well meant, but it will do nothing to limit interest charges, and it could extend the loan period if the capital paid off reduced the monthly minimum payments.
The answer could ultimately lie in converting the credit card debt agreement into a fixed-term loan, in which the proportion of the payment going to reducing capital increased each month, or at least in finding a way in which the capital element of the minimum payment could be fixed in regard to the original amount borrowed. The important thing is to reduce the speed of the pay-down. We cannot have people in this debt for 20 or more years, as some of my constituents have been, and my Bill will achieve that. It might still take many years for the magic “three times” threshold to be reached, but at least borrowers will be able to see for the first time light at the end of the tunnel.
I cannot conclude my speech on the Bill without encouraging the borrowers who are having problems paying their debts—whether it be to credit card companies, payday lenders or banks—to seek help from a free agency such as a citizens advice bureau or StepChange as early as possible. That is possibly the most important way of easing the burden, but I believe that there are other measures that we could operate proactively to support borrowers in financial difficulty, which is why I have added my voice to this debate. I commend the Bill to the House.
Question put and agreed to.
That Yvonne Fovargue, Nic Dakin, Jonathan Edwards, Stephen Lloyd, Nick Smith, Heidi Alexander, Tracey Crouch and Andrew Percy present the Bill.
Yvonne Fovargue accordingly presented theBill.
Bill read the First time; to be read a Second time on Friday 25 January 2013, and to be printed (Bill 96).