£17 billion lent on credit cards without proof of income

Over 4.8 million credit cards (84%) have been issued in the last 12 months without proof of income or outgoings, according to uSwitch.com. With an average credit limit of £3,545, successful applicants have been granted over £17 billion worth of credit without being asked to provide simple proof of income - such as a wage slip - to verify their earnings.

With the credit crunch dominating consumer finance and the mortgage market becoming increasingly challenging, affordability checks should be the number one priority for credit providers. Although the number of rejected credit card applications is on the increase and currently stands at 540,000 a month, the fact remains that 14% (805,000) of successful applicants were not even asked about their salary or outgoings on the application form. Equally just 8% of applicants were actually asked to provide proof of their income or outgoings. This study highlights some of the ongoing issues with the industry's existing credit checking procedures.

77% of people did not get their credit card from their own bank

The banking industry has previously tried to discredit the issues raised in this study by claiming that most customers apply to their existing bank for credit. If this is the case, the bank should probably have income and affordability data on the customer and therefore would not necessarily need to ask for it again. However, this year's study reveals that 77% of credit card applicants did not apply for the card through their bank, so the lender would have had little or no information about the applicant's income or financial commitments.

Banks are helping existing customers

With £17.3 billion written off by the banks in bad debts in 2007 alone, allowing consumers to take on more debt than they can manage is not in providers' best interest. In fact, several credit card providers have already taken measures to ensure existing customers do not drown in debt. In the last 12 months alone, 1.6 million credit card customers have had their credit limits reduced in an attempt by providers to reduce risk and over-indebtedness.

To put this into context, credit card spending in the UK totals £146.4 billion which is the equivalent of 10% of the UK's total personal debt at £1,430 billion. There are now 69.5 million credit cards in circulation with a total credit limit of £177 billion so there is a need for providers to take reasonable action to protect consumers from becoming over-indebted.

Honesty is the best policy

Almost 200,000 credit cards were issued to consumers that added up to 70% onto their real salary. These consumers secured over £693 million of credit based on inaccurate information. At a time when Britain's household debt is increasing by £1 million every five minutes, stretching the truth on application forms can have fatal consequences. More than five million credit card customers have missed payments in the past six months incurring late payment fees totalling £61 million.

Simeon Linstead, head of personal finance at uSwitch.com, comments: "We cannot ignore the fact that the credit crunch has forced lenders to tighten their belts and reject applications that may lead to further write-offs. The fact remains that just because a consumer appears to have a ‘suitable' credit score, it doesn't mean they are always honest about their income and actually have the cash available each month to pay the bill. The credit squeeze will back some consumers into a corner and, in sheer desperation, people will resort to lying about their salaries as this is such an easy loophole to exploit.

"Back in April, we uncovered that £20.9 billion was advanced in personal loans in the previous 12 months without any income checks being carried out - so this problem is not exclusive to the credit card market. Further credit checks could be a costly exercise for the lenders and could lead to a decline in the number of accepted applications. However, it could be a small price to pay if it helps to curb bad debt write off's and personal indebtedness.

"We cannot ignore the fact that consumers have a responsibility to borrow sensibly, but lenders need to help the process and tighten their credit checking procedures. It is too early to say if the amendments to the Banking Code are resolving these problems but there is clearly an urgent need for watertight measures to be put in place to ensure that the banks are lending responsibly."

The new Banking Code

The latest version of the Banking Code, which came into effect in March 2008, is not dissimilar to its 2006 counterpart with regard to promoting responsible lending. However, one very positive move is that credit reference checks are now mandatory. Companies are also required to make at least one of the following additional checks - income and financial commitments, how credit has been handled in the past and credit scoring. However the value of the checks depends on which ones are carried out.

The credit check

A credit report can be obtained from several credit reference agencies. It provides a clear picture of the consumer's financial history, a credit score, a credit rating, details of electoral register, county court judgements etc. This will give the financial provider an indication as to whether the consumer can repay the credit applied for based on past behaviour. The provider will calculate a final credit score based on all of this information. However, these reports are not updated daily and in some cases it may take up to two months for a change to appear. This could be a problem if someone hits financial difficulty and applies for more than one form of credit in a short period of time.

Simeon Linstead concludes: "Credit card companies have had a rough ride with bad debt so they have tightened their lending criteria and lenders have reduced the amount of credit on offer to applicants - credit is undoubtedly harder to come by but there are still good deals out there - it's just that fewer people will be able to take advantage of them. The credit card industry will never be stagnant. There is always a glut of new offers available but consumers cannot view managing their finances effectively as a spectator sport - they need to be willing to invest time in shopping around to make great savings."

For more information visit uSwitch.com.