Consumer credit research: credit cards

Credit cards allow consumers to make purchases or cash withdrawals on credit, up to an agreed limit.

A consumer borrows from the credit card issuer when they use their credit card, for example, when they make a payment, withdraw cash or make a balance transfer.

Our view

• Credit cards provide a free service for many, but the market may not be working well for certain groups.
• There is a range of behavioural factors at play which may lead consumers not to choose or use cards in the best way for them.
• Consumers paying interest on balances may be paying more than they realise or originally expected. They may also be subsidising users for whom card usage is free.
• Some consumers tend to use up credit limits quickly, repeatedly make minimum payments and do not consider how they will repay their credit card debt.
• A small proportion of consumers may be using cards unsustainably.

Key findings

Consumers

• Most UK adults hold a credit card. There are about 30 million cardholders (UKCards Plastic Cards 2013[1]). Together, they currently owe £56.9bn (Bank of England Statistics[2]), 40% of which incurs no interest (UKCards 2013[3]).
• 60% of credit card holders report paying off their balance monthly (UKCards Annual Report 2013[4]).
• Many consumers appear to have a limited understanding of how to manage spending on their credit cards in a sustainable way.
• Repeated direct mail, pre-filled card applications and credit cards being sold as part of packaged bank accounts, lead some to purchase credit cards reactively, with little or no shopping around.
• Those who do shop around focus on one or two features (0% teaser deals, bonus schemes, APR) and may not form a rounded view of value for money.

Firms

• There is a range of providers, such as banks, mono-lines (firms that only provide credit cards), subprime-focused issuers (that primarily target cards to those with a weak credit history).
• There is strong competition for certain consumer groups, particularly those seeking 0% balance transfers.
• Interest generates the most revenue for credit card issuers.
• Interchange fees appear to be used to pay for rewards (This is a fee paid by the retailer to the card issuer when the cardholder makes a payment).
• Most cards have a complex combinations of features.

What we will do next

In light of this, we are concerned that there are underlying issues relating to business models and competition.

We will launch a market study into the credit card market. It is important to say that there are no pre-determined terms of reference or outcomes for the study.

At present, we are developing the scope and focus of the study and we expect to launch formally later this year. We will also be engaging with the industry as part of the study.

The market study will be alongside other work in consumer credit related to credit cards, such as supervisory activities, including planned visits to credit card firms.

Further information

We carried out intensive consumer research to help us understand:

• what consumers want and expect from the credit market
• the role that credit plays for consumers in different circumstances and at different points in their lives
• how credit can either help consumers or lead them into difficulty

You can see in-depth assessments into other areas of the credit market where we have seen potential risks to consumers. These are:

• Debt management[5]
• Logbook loans[6]
• Overdrafts[7]

You can also see more detail in our full consumer research report[8].