As many as one in three people who hold subprime credit cards with interest rates as high as 70 per cent are in problem debt, according to a new report released by the debt charity StepChange.
Around four million people in the UK have at least one of these cards, which are often targeted at those who have poor credit histories or are in financial difficulty.
StepChange is calling on the Government to increase minimum payment rates and cap the costs of such cards to stop them dragging vulnerable people into even more financial problems.
Around 4million people in the UK have at least one subprime credit card. These cards have interest rates of between 39 and 70% and have been blamed for problem debt by StepChange
The report from the charity sheds some light on a credit product that receives less attention than payday or guarantor loans, the issues with which are well documented.
A quarter of 5,300 people surveyed by YouGov said they were already behind on essential bills like council tax payments, rent or utility bills when they took out a subprime card, while one in five of the charity’s own clients said they were unemployed when they applied for one.
Subprime credit cards have APRs of between 34.9 per cent and 70 per cent. This makes them cheaper than other short-term high-cost credit products like payday loans but the costs can still mount up if you don’t pay the balance off and get into debt.
Their higher APRs compared to other credit cards are down to the fact they are aimed at less creditworthy borrowers, and are sometimes marketed as cards ideal for building your credit history.
Andrew Hagger of personal finance website Moneycomms, told This is Money that unless the balance was paid off in full ‘I wouldn’t recommend these cards for anything but an emergency or very short term borrowing’.
However, the charity said that this wasn’t what took place in practice.
Just one in 10 used them as a credit builder card, while StepChange chief executive Phil Andrew said the research pointed to a ‘vicious circle’, and that ‘far from being a lifeline, subprime cards currently are often a very expensive debt trap in the long term.’
He added: ‘If you’re in debt you’re quite likely to take out a subprime card; if you have a sub-prime card it’s quite likely to exacerbate your debt.’
StepChange said those who came to them for advice mainly took out subprime cards in cases of ill-health or redundancy, or to bridge gaps in income and repay existing debts.
Because of their credit history, they are unlikely to have access to products like 0 per cent balance transfer cards from high street banks.
A quarter of those surveyed said that when repaying debt on a subprime card they had had difficulties – including exceeding their credit limit, missing repayments or being in persistent debt.
Among the charity’s clients, two-thirds were only able to repay the minimum payment every month, and nearly four in five felt that such subprime cards had a negative impact on their financial situation.
One person who went to StepChange for help described these credit cards as ‘wolves in disguise’, while another said the companies which offer them ‘just keep feeding the rope to you for you to hang yourself’.
Alastair Douglas, the chief executive of credit comparison site Totally Money, said a lot of people were ‘dangerously unaware’ of how long it takes to pay off debt when only paying the minimum credit card payment each month.
He said: ‘It’s really important people try to avoid slipping into the “minimum repayments trap”.
‘A recent Totally Money survey found more than six in 10 expect to clear their debt in half the time it takes by making minimum repayments.
‘But, by only making the minimum repayment, people could be signing up to a 30-year repayment plan.
‘Many are dangerously unaware how long it takes to clear debt by only repaying the minimum.’
StepChange called on the Government to change ‘the fundamental design and operation of subprime cards’, by banning unsolicited credit limit increases, suspending interest charges for consumers in persistent debt, boosting the minimum payment on such cards and capping the cost of credit to 100 per cent of the amount borrowed.
Mr Andrew said: ‘Given the strong link between subprime credit cards and problem debt, it’s time for the regulator to take specific action in this part of the credit card market.
‘The fundamental design and operation of subprime cards needs to change, and that’s why we’re calling on the FCA to take targeted steps on subprime cards, such as increasing the minimum balance payment level to at least three per cent on new cards.’