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  • What John McDonnell might have meant to say in Brighton about credit card debt Posted on 28 September 2017

    Earlier this week shadow Chancellor John McDonnell vowed to cap interest charges on credit cards if Labour is elected. The cap would mean that consumers would never pay back more than twice the amount of their original borrowing.

    Following the apparent success of the FCA’s payday loans price cap in addressing the worst excesses of that market (even with some less welcome side-effects), it was inevitable that sooner or later other caps would be proposed. It’s also understandable that Labour now appears to be attracted by the element of the payday cap that is simple to explain and understand, that borrowers must never have to pay back more in fees and interest than the amount borrowed.

    A key difficulty with McDonnell’s proposal as described is that for a revolving credit facility rather than a fixed debt product it could be remarkably complicated to calculate the ‘twice the original amount’ cap. Even if a methodology could be found, the calculation would be indecipherable to consumers.

    Another approach may be needed, and one option for Labour is to cap the total amount of interest and fees that a credit card borrower can be charged per year to half of the borrower’s credit limit. This wouldn’t affect most borrowers who owe less than their credit limit, but should help avoid the most extreme cases where consumers accumulate huge interest liabilities exceeding their borrowing limits.

    This might seem to incentivise lenders to increase credit limits, but lenders are already obliged to ensure that increases are affordable. If a borrower was maxed out in interest and fees charges, any increase in the credit limit would be difficult to justify.

    On the surface this alternative seems to tick the boxes of being simple, practical and likely to be quite effective, but does that make it right? In this politicisation of financial services regulatory methods, that may prove to be for the electorate to decide.

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