Written by Mark Fairlie
The Labour Party, if returned to government, will introduce a cap on the debt that can be built upon credit cards so that no-one pays in interest more than what they originally borrowed.
Speaking to the conference floor, Shadow Chancellor, John McDonnell, told delegates,
“I am calling upon the government to act now and apply the same rules on payday loans to credit card debt. It means that no-one will ever pay more in interest than their original loan. If the Tories refuse to act, I can announce today that the next Labour government will amend the law.”
What are the payday loan rules?
In 2016, the Financial Conduct Authority set down a new set of rules that providers of payday loan and short-term loans had to abide by. If they did not, they would be denied the permission they needed to continue to lend money out to consumers.
The rules are that:
- interest and fees that lenders charge to borrowers cannot be higher than 0.8% per day of the amount borrowed,
- default fees for missing payments could not be more than £15,
- a lender can continue to charge interest after a default but at no more than the rate agreed when the loan was taken out, and
- a consumer would never pay more in interest and fees than the original amount of the loan. For example, if a consumer borrowed £250, they would never pay back more than £250 in interest and fees on top of the original amount.
Why is there a need for this on credit cards?
Mr McDonnell, according to the Independent, stated that official statistics show that Britons owe £14bn on credit cards.
The paper also reported that the Labour Party is concerned that, while wages have been rising as little as 0.7% a year between March 2012 and March 2017, household debt has been going up at 7.3% a year.
There are also worries that new credit cards and loans handed out by lenders every month were increasing at the rate of £1.7bn a month and that a growing number of families were using credit cards for everyday essential items.
What has the reaction been to the announcement?
Speaking to BBC News, UK Finance, formerly the Council of Mortgage Lenders, has reinstated its “commitment to responsible lending”, stating that, “the last thing the industry wants is to see those who are most vulnerable being pushed towards the hands of unscrupulous and unregulated lenders”
Liz Truss, chief secretary to the Treasury, told the Guardian that Labour were “taking it too far”, and that the government set up the Financial Conduct Authority to ensure
“credit card firms do more to help their customers clear debt and, from January, rip-off credit card charges will be outlawed.”
Hannah Maundrell from money.co.uk said, as reported in the Daily Express,
“If Labour’s proposal ever came into force it sounds like it could help people in the debt spiral but it’s not getting to the root of the problem…Credit card companies aren’t offering record interest-free offers out of the generosity of their hearts – it’s all about their bottom line.”