Credit card debt research to be carried out

The government has revealed it is to carry out research into the potential impact of introducing legislation to cap the cost of credit.

While this may help lower the level of credit card debt by limiting the amount that may be charged, there may also be potential pitfalls, such as a restriction on borrowing for many people, leading to exclusion from the mainstream market and therefore driving such consumers towards high-cost and often illegal lenders.

Explaining the reasoning behind the research, consumer minister Ed Davey said: "We know that intervening in the high cost credit market carries risks that we will make things worse for those we are trying to help. We do not want to force people into the arms of the loan sharks so we need robust evidence of what the impact of this proposal might be."

The outcome of the research could therefore decide what – if any – controls the government imposes by law.

Alongside the research will be a new service to co-ordinate debt advice that the Money Advice Service will help formulate, financial secretary to the Treasury Mark Hoban revealed.

Responding to the news, financial services expert at Consumer Focus Marie Burton welcomed the plan to cap card rates, but said "more is needed" to deal with debt problems.

She said nobody should be allowed to take out more than four payday loans in a year, as such regular borrowing would be a sign of deeper financial problems that require action through the provision of debt advice.

Ms Burton argued the widespread use of such credit underlines the need for banks to offer better deals and for there to be more alternatives available through credit unions and post office banking.