A plan to help people in serious debt has been announced by the Government as a financial website warns that credit card costs are at their highest level in over ten years.
The Treasury said it was launching a consultation until January on how its “breathing space” scheme could work and in what circumstances amid concerns about growing problem debt levels among “millions of people in the UK”.
The idea is that borrowers would be given – as a last resort – a six week grace period from higher interest charges and enforcement action to give them time to prepare a repayment plan.
:: Four million consumers falling behind on debt
It was revealed in the summer that unsecured credit – which is borrowing through credit cards, overdrafts and car loans – had topped £200bn for the first time since the financial crisis.
Regulators and economists have sounded warnings that the annual rate of growth in that total – at just under 10% – is unsustainable for both consumers and lenders alike – with banks signalling they will cut back.
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More people have turned to credit in the wake of the Brexit vote amid record low interest rates and pressure on household budgets from rising inflation and weak wage growth.
The financial website Moneyfacts said on Tuesday it had noted that credit card APRs – the interest rate applied to debt over the course of a year – had jumped to an average 23%.
It said it was the highest level for 10 years and “countless” borrowers were relying on them to make ends meet.
:: Young people worried about finances
The Economic Secretary to the Treasury, Stephen Barclay, said: “For many people in the UK problem debt seems impossible to escape.
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“Its effects can be far-reaching, impacting all aspects of a person’s life and leaving them feeling helpless.
“That is why we are working to give people who are overwhelmed by debt more time to seek advice, find a workable solution, and help get their lives back on track.
“Although many people can and do use credit successfully to manage their personal finances, for the minority who get into difficulties this government wants to offer more support.
“The new scheme could include legal protections that would shield individuals from further creditor action once a plan to repay their debts is in place.”
Adrian Hyde, president of insolvency trade body R3, welcomed the proposals but urged the Government to ensure they struck a balance between the needs of borrowers and creditors.
He said of the six week time frame: “A longer breathing space would be a concern to lenders worried about the length of time it might take to recoup outstanding debts.
“This risks lenders becoming less likely to lend in the first place, or raising the cost of borrowing.”
Jane Tully, director of external affairs at The Money Advice Trust – the charity behind the National Debtline service – said: “Many banks and credit card companies already offer ‘breathing space’ by freezing interest and charges as a matter of good practice, but a statutory scheme will extend this significantly.”
The Trust said it was “crucial” public sector creditors, such as local authorities and HMRC, were included in the scheme alongside private sector lenders.