High credit card debt sparks calls for 'breathing space'

As credit card debt continues its climb to record levels, economists from bodies including the Bank of England and the Financial Conduct Authority (FCA) are worried both for consumers and the wider economy. In response, both the Conservative and Labour parties have pledged to take action.

Sharp rise

Debt charities believe that the rise in credit card debt is the result of fierce competition between rival providers at a time of low interest rates. With many companies offering long interest-free periods, consumers are encouraged to spend more than they can afford. But once this period ends, interest payments mount up.

However, some commentators also point to falling incomes as wages stagnate and inflation continues to rise. Others suggest that economic uncertainties and trends towards unstable employment and ‘zero-hours contracts’ are also forcing more people to rely on credit cards to make ends meet.

Problem debt

With so many struggling to pay back these debts, it’s no surprise that the FCA has focused on this so-called ‘problem debt’ in its own investigation. The regulatory body estimates that 3.3m people struggle with persistent debt – and end up paying more in interest and borrowings than on paying off the debt.

Last year alone 600,000 people contacted debt charity StepChange, a figure that highlights just how widespread persistent debt can be. If interest rates rise from their current low levels, that number is likely to grow.

Managing repayments

Against this backdrop, both the Labour and Conservative parties are addressing the issue. Specifically, they're both arguing for a ‘breathing space’ policy. In practice, this would allow people to freeze their problem debts and impose a manageable, legally-backed repayment plan.

While some companies may fear how this will affect their cash flow, it may well be preferable to FCA proposals to force companies to reduce, cancel or waive interest charges on problem debt. If both companies and debtors can work together to find a manageable, fair solution to persistent debt, without needing complex legal systems, it may be easier for everyone.

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