Debt worries ‘may be reduced by credit charge caps’

The cost of consumer credit will produce fewer debt worries if the rates of interest firms can charge are capped, a new report has claimed.

Consumer Focus has said a major source of problems is the high cost of credit available to those on low incomes and said more cheap credit through measures such as credit unions is needed in Britain.

It noted that in France and Germany – where personal debt as a share of national wealth is much lower – credit rates are capped, an idea the UK government is considering introducing.

However, access to credit for poorer people is limited there, in contrast to Britain which has “one of the most developed sub-prime credit markets” in the European Union.

In Australia, on the other hand, indebtedness is at similar levels to Britain, but banks are more heavily involved in social lending and restrict the purposes the money can be used for to items like large goods and lending, rather than paying bills.

The charity said it hoped the study could help inform policy as the UK government seeks to tackle the problem of high-cost borrowing taken out by low-income consumers.

It advised banks should be more involved in offering low-cost credit.

Borrowing payday loans and other high-cost credit is something that can lead many people swiftly into unmanageable debt, it was noted recently.

Director of partnership development at Credit Action Liz Dunscombe warned that the “ease” with which they can be obtained means some will take them on for non-emergency purposes and find they cannot take them back.

By James Francis