Labour’s shadow chancellor John McDonnell used his speech at the Labour Party conference to reiterate a point made by the Financial Conduct Authority that there are now over three million people in the UK trapped by what the regulator calls 'persistent debt'.
These are borrowers who are now paying more in interest and charges than the size of their original loans.
According to the FCA these borrowers pay around £2.50 in charges and interest for every £1 borrowed.
In response McDonnell suggested capping the total amount that all companies are allowed to charge their customers, meaning that no borrower will ever pay more than the amount that they borrowed in interest and charges.
The shadow chancellor is right to highlight problems in credit card lending, but a blunt cap on chargeable rates would drive many lenders from offering credit cards to borrowers trying to build, or rebuild, credit ratings.
Starter cards with low credit limits and high APRs are a way for borrowers to build a credit history which is vital for mortgage applications and other forms of borrowing.
If used responsibly they allow for borrowers to build a credit history and to sometimes make ends meet between salary payments.
The FCA has pledged to work with lenders to make sure that borrowers aren’t trapped in persistent debt cycles — but a hard cap, as in McDonnell’s plan, would be taking a sledge hammer to a nail.
Instead other remedies which are being put forward by the FCA would encourage borrowers to increase the rates of repayments on their credit card bills earlier in the debt process, which would be a more effective way of helping struggling borrowers.
Borrowers should be encouraged to pay off debt faster, rather than just making the minimum payment on their card per month, while lenders should play a role in that and do more to encourage it.
Predatory lending, of course, should be policed, but most originators still lend on the basis of being paid back with interest, rather than to milk borrowers through excessive charges.
McDonnell’s plan could hurt a large proportion of credit card lenders but it could also harm the vast majority of borrowers out there who are not trapped in persistent debt, and do pay off their cards at a reasonable pace, by cutting the number of companies willing to offer cards to borrowers deemed risky.