5 min read

Behind the headlines: FCA announces crackdown on high-cost credit

Hannah Salih
31 May 2018

Great news from the Financial Conduct Authority this morning as they have revealed plans for a clampdown on high-cost credit, including rent-to-own schemes, store cards and overdrafts.

After nearly two years of research into the costs of high interest borrowing the UK’s financial watchdog, the FCA have called for a ‘radical overhaul’ of high-cost credit.

They’ve put together a set of potential rules and initiatives that would help and protect consumers from the high costs of overdrafts, store cards, rent-to-own schemes and other high-interest products. Here's our quick overview of what could change...

Overdrafts

Although the FCA identified unarranged overdrafts as one of the costliest forms of credit, they have said they need to launch further consultations on whether or not to bring in caps on interest rates.

But the good news is that, after the 18 month review, the FCA have requested that banks provide customers with alerts on their phones that give prior warning before they reach their overdraft, as well as more online tools entering the market that try to “demystify” the implications of what overdrafts mean.

In addition, they want to further look into banning the messages that appear on ATMs that say you have “available funds” but include your overdraft limit.

Find out more about how overdrafts work.

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Rent-to-own schemes

Rent-to-own lets you buy household appliances and then pay the money back over a number of years. This can help you spread the cost but they often come with very high interest rates. So a fridge that costs £250 on the high street, could end up costing you over £1000 through rent-to-own.

The FCA have put forward the idea of introducing price caps. This would limit the amount of interest rent-to-own companies could charge, although it needs further analysis so wouldn’t come into play until 2019.

They also suggested banning the sale of extended warranties with these appliances.

Store cards

Store cards can often appear to be very attractive, luring you in with discounts, freebies and other benefits. But the reality is that they often carry eye-watering interest rates and fees and charges at every turn. They are instantly available at store counters, which means people don’t often have time to consider their options or look at the terms and conditions before taking them out.

The FCA have urged lenders to give clearer explanations of store cards, the offer periods and the costs of not paying back the balance within the offer period.

Here's what Justin Basini, our CEO has said of store cards:

“If you are fully informed and careful, there can be benefits. For example, if you have a thin credit file using a store card can be a good way to build up your credit score, as long as you keep your balance low and always make your repayments. Consider setting up a direct debit to make sure the card bills are always paid on time. That way, you’ll set your mind at rest that you’ll never miss a repayment and won’t negatively impact your credit score.”

Find out more about what to watch out for with store cards.

Our CEO, Justin Basini said of today's news:

“The FCA’s suggested reforms will be a good step towards preventing consumers paying over the odds for credit in future.

“The majority of us need to use credit from time to time to fund big purchases, and when managed well this is normal. However, there are reams of different credit options out there and it’s vital consumers have the information they need to make an informed choice.

“This means having free, clear information available to people but also having more open conversations about money. The earlier this starts the better, yet our research shows only a third of parents have talked to their teenagers about money and debt, which may let many fall into bad financial habits early in life.

“Before taking out any credit it’s important to understand the terms. Always make sure you have a plan to repay the credit and make the monthly repayments and if you ever feel out of control, consider seeking help from debt charities like StepChange.”

by Hannah Salih

Hannah reads all the finance info on the web so you don't have to. She knows all there is to know about your finances but still spends all her money on brunch. 

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