Borrowers face debt trap over credit score squeeze

Credit card borrowing rose at its fastest rate in nearly two years in the run-up to Christmas, and those debts are now due.

The average interest rate on credit card purchases stands at a record high of 35.8%. That’s a hefty incentive to pay your card off each month – yet the latest figures show 48% of cards are incurring interest.

The Financial Conduct Authority was sufficiently concerned back in 2018 about “persistent debt” – when you are shelling out more in interest than on reducing your balance – that it told banks to be more responsible. Before giving out new cards or increasing credit, lenders are supposed to take reasonable steps to ensure the customer can afford it without struggling financially or compromising “basic quality of life”.

But it’s not just the lenders who promote cards, it’s the credit score industry. Conventional advice is that people looking for credit, especially if they have struggled with debt, should sign with one of the three big credit score providers – Experian, Equifax (and its app ClearScore), and TransUnion (Credit Karma app).

Improving your credit score can unlock cheaper borrowing and help you manage your finances better.

The potential danger for many is that as you pay down debt and start to get straight, your credit score improves, and you become a target for credit card promotions.

I met Bristol mother-of-five Amanda, who is on Universal Credit but had spent years doggedly reducing £12,000 of card debt, as part of a Panorama investigation. When she got closer to financial stability, her credit score updates from Experian began to change.

Her phone record showed she had been bombarded with emails offering a range of high interest “credit-builder” cards. She had accepted one, the offers continued, and she found herself slipping back into old habits.

She wasn’t aware that companies like Experian are paid commission by credit card lenders for promoting their products.

Experian said the emails “highlighted options that could have allowed her to consolidate her debt and pay it off sooner or for less”.

It also said it was “developing a process to identify potentially vulnerable customers and prevent them from receiving marketing emails”.

The Centre for Responsible Credit is concerned. It surveyed 3,415 low- and medium-income adults last September and found over half (55%) had received suggestions or offers for credit card products from their credit score provider. Half of those (49%) felt the offers encouraged them to take on more credit than they could afford, and over a quarter (28%) reported feeling pressured to accept them.

Put up defences if you need to. You can opt out of marketing emails by changing the preferences in your various accounts, and for mail opt-out you can visit the Mailing Preference Service website. If you are running into problem debt, contact your lender as they do have a responsibility to you, and know you can turn to a debt charity, such as Stepchange or National Debtline.

Photograph by Yiu Yu Hoi/Getty Images