Creditors Are Not Checking Affordability To Repay Credit

Lenders were today urged to make checks on potential borrowers' incomes after it emerged that some credit card customers were being allowed to borrow more than 100% of their salary.

Research for price comparison website Uswitch.com revealed that 88% of people who had successfully applied for a credit card over the past year had not been asked to give any proof of their income. Instead lenders were happy to rely on information given on application forms.

As well as failing to verify that information, Uswitch said lenders had also failed to get a full picture of their customers' ability to repay borrowing, with 95% of cardholders saying they had not been asked to show evidence of their monthly outgoings when applying for the credit.

As a result, said Uswitch, it had found evidence of cardholders being offered credit limits in excess of their annual earnings and of customers being offered cards despite being unemployed. Six people surveyed who were earning between £10,000 and £20,000 had been give limits of between £8,000 and £10,000, while one person earning less than £10,000 had been given a limit between £10,000 and £12,000.

Uswitch's calculations show that this borrower would need to repay over a third of their monthly take home pay to meet the minimum repayment on the debt and would spend over 28 years and £8,600 in interest clearing the debt. The researchers also found two cases where unemployed customers were given cards with credit limits of between £6,000 and £8,000.

Uswitch's head of personal finance, Nick White, said new measures were needed to ensure lenders were being responsible when granting credit.

"The finding that only one in eight cardholders provided accurate salary or income details during the application process emphasises the significance of the lenders' failure to conduct proper checks," he said.

"We are particularly concerned that those applicants least likely to be truthful about their incomes are all from the most vulnerable groups, namely the self-employed, students, the unemployed, and those on low incomes. It is time for the banks to put proper measures in place to protect borrowers from over-extending themselves financially."

UK consumers are estimated to have a total credit card balance of over £56bn, a figure that accounts for two-thirds of outstanding credit card debt across the EU as a whole. Last week, KPMG said 2005 had seen a 75% increase in the number of people setting up individual voluntary arrangements (IVAs) with their creditors, and that the average debt among these people had reached £60,000.

It cited examples of a 19-year-old woman with debts totalling £25,000 and several 21-year-olds with debts of around £40,000.

"Typically the sort of debts we are talking about here are personal loans, credit card balances and other forms of buy now, pay later unsecured loans," said Steve Treharne, head of personal insolvency at KPMG. "Given the average level of debt, too many people are borrowing money that they have no realistic hope of repaying."

Hilary Osborne and agencies
Monday January 23, 2006