Ask me no questions and I’ll tell you no lies

Uswitch.com challenges the banking code standards board to make income and affordability checks compulsory for all unsecured lending products.

uSwitch.com’s annual Credit Card Affordability study reveals that one year on from its initial investigation, the income and affordability checks carried out by credit card providers are still woefully inadequate. Despite the fact that only six months ago we saw the implementation of changes to the Banking Code aimed at tightening up the assessment of lending criteria used by providers to establish a customer’s ability to repay their borrowing, uSwitch.com’s latest study reveals that, in the last 12 months, 89% of credit cards were issued without the applicant being asked to provide proof of income and 96% were not required to submit proof of their outgoings – an increase of 1% on last year’s figure. Put into context, new credit card customers secured £3.08 billion of credit without providing proof of income.

The banking industry has previously tried to discredit the issues raised in this study by asserting that most customers will apply to their existing bank for credit, and the bank will therefore hold the necessary income and affordability data if the customer already has a current account with them. Accordingly, so the industry says, there is no need to ask for this information during the application process. However, this year’s study has investigated the validity of these claims, and has revealed that 74% of successful credit card applicants surveyed did not apply for a new credit card through their bank. More worryingly, further analysis showed that 90% of these applicants were not asked for any proof of income or expenditure beyond the point of application. In effect, these credit cards were issued with no proof whatsoever that the customer would be able to afford to repay the additional credit.

Nick White, Director of Personal Finance at independent online price comparison and switching website, uSwitch.com, said: “Credit card 'spend' in the UK totals £145.4 billion which is 12% of the UK’s total personal debt. Yet again the uSwitch.com Credit Card Affordability study has unveiled the alarming reality of the inadequate checks and procedures carried out by credit card lenders. It will come as no surprise if in the forthcoming bank reporting season, later in February, the banks announce record levels of write offs in bad debt.

“In conducting this study we are not seeking to sensationalise an issue that doesn’t exist or blame the banks or regulatory bodies for consumer debt. We are just raising an issue that needs to be resolved to ensure that adequate remedies are put in place to stop the UK debt epidemic from claiming any further victims. The solution for this is an urgent amendment to the Banking Code stipulating that income and affordability checks become compulsory on all unsecured lending products.

“The level of credit offered to consumers still remains one of the most prominent issues explored in this study. It’s nothing short of irresponsible for providers to grant applicants living on less than the average wage credit limits which they would never be able to afford and in many cases tie them to a lifetime of debt.”

White continues: “We continue to re-iterate that consumers have a responsibility not to take on more debt than they can manage. Our statistics show that credit card balances can become unmanageable if people make full use of their credit limits and only ever make the minimum repayment.”

At a time when Britain’s household debt is increasing by £1 million every four minutes, and more than 67.8 million credit cards are in issue in the UK - an average of 2.5 for every person, some of the more alarming statistics revealed in uSwitch.com’s Credit Card Affordability study include:

One person, earning less than £5,000 per year, was given a credit limit of £20,000 - £30,000. uSwitch.com’s calculations show that this person would have to pay up to £500 per month just to service their minimum repayments. In total, it would take over 57 years and four months to clear the balance whilst paying £41,104 in interest.

One in five people earning between £10,000 - £15,000 per year lied when asked about their salary on the application form, adding at least 10% to their actual income, and in some cases more than 90%.

15% of all people that applied for a credit card were given a higher credit limit than they asked for.

Nearly one in five (17%) of those earning below the average national salary were given a credit limit higher than they requested.

Nearly a fifth (19%) of people earning between £10,000 - £19,999 were offered a credit limit of up to 60% of their gross annual income (between £4,001 and £6,000).

Three people earning between £15,000 - £20,000 received a credit limit of between £20,000 - £30,000.

13% were given credit limits of between £6,000 - £10,000, one in 12 applicants with no income were given the same limit.

7% of those earning below £5,000 were offered a credit limit in excess of their annual salary.

White concludes: “Already one person is falling victim to insolvency every minute of every working day and Individual Voluntary Arrangements (IVAs) are increasing by 118% per annum. Back in November, we also discovered that £11.9 billion was advanced in personal loans in the previous six months without any income checks being carried out. It is therefore vital that the necessary changes are made to the Banking Code. We hope that the impending independent review being carried out by Mike Young on behalf of the BBA will address the issues raised by this study once and for all. uSwitch.com will certainly use this opportunity to lobby the issue on a formal basis.”