More checks required to curb credit card debt

February 2, 2007

Evidence from independent comparison site uSwitch.com shows 89% of people applying for credit cards last year were not required to show any proof of income and 96% did not need to show their outgoings causing further concern that banks and building societies are offering people credit cards without any regard to whether they can actually cope with repayments.

Nick White, the director of personal finance at uSwitch says,"It's nothing short of irresponsible for providers to grant applicants living on less than the average wage credit limits which they would never be able to afford and in many cases tie them to a lifetime of debt."

The results of their survey show that a person in the UK who earned under £5k a year was given a credit limit of £20,000 to £30,000.

Using this example, if this person took that to the limit, they would then have to pay £500 a month (which is £6,000 a year) just to cover the minimum repayments. uSwitch estimates that by only meeting minimum repayments it would take more than 57years and 4months to clear the balance. This would cost £41,104 in interest.

The survey also highlighted that people are regularly lying on the application forms, with one in five who earn between £10-£15,000 lying about the amount of their salary.

All the blame cannot be put on the applicants’ shoulders, since the lenders were shown to give 15% of successful applicants a higher credit limit than they had originally requested.

Mr.White cites credit card debt in the UK at £145.4billion. This is 12% of the UK’s total personal debt. He believes a simple change in the banking code could make a big difference to these figures.

At present the bank code calls for lenders to have any 2 of the following proofs before lending money:-income and financial commitments

• evidence of previous financial handlings
• data from credit reference agencies
• data from applicant’s employer/landlord or similar (with prior consent)
• credit scoring or similar assessment technique

Mr.White suggests that in addition to the two proofs already required, that lenders also ask for proof of income beyond the application process and match it with a requirement for details and supporting evidence of expenditure-just the way many mortgage applications ask for the information.

While Mr.White cannot deny it is each individual consumer’s responsibility not to take on more debt than they can comfortably handle, the banks could however help a little by introducing this other form of proof.