Contactless cards are fuelling boom in debt

‘Forgetting lessons of past’

THE soaring popularity of contactless cards and online shopping has fuelled a boom in household debt, the Bank of England warned yesterday.

Announcing a raft of measures to tackle Britain’s borrowing binge, Governor Mark Carney said some banks appear to be ‘forgetting the lessons of the past’ as they provide a glut of easy credit.

To combat this, he has ordered banks to raise an extra £11.4 billion over the next 18 months to protect themselves.

In its half-yearly risk assessment, the Bank said new technology is encouraging consumers to rack up more debt as they use credit cards for daily purchases.

It said: ‘Technological changes, such as online shopping and contactless cards, have encouraged greater credit card use for transactional purposes.’

Households spent almost £4 billion using contactless cards in April, almost 150 per cent more than the previous year.

These cards allow shoppers to make a ‘tap and go’ payment of up to £30 per transaction.

Just over half a billion pounds of the total was on contactless credit cards, according to figures from the UK Cards Association.

Although they are quick and easy to use, critics say they encourage guilt-free spending as shoppers do not have to withdraw cash or even enter a PIN to make a purchase. A similar logic applies to online shopping. The Bank’s intervention came as it announced plans to curb the rapid growth in consumer credit, with households borrowing on car finance, credit cards and personal loans at the fastest pace since before the finan- cial crisis. In its Financial Stability Report, it said some lenders are behaving irresponsibly by relaxing their affordability checks when they decide whether to issue loans and credit cards.

Cutting rates on personal loans and credit cards has made banks less capable of absorbing losses if borrowers fail to pay back their loans, according to the Bank.

To combat this, it has ordered banks to raise an extra £11.4 billion over the next 18 months to protect themselves.

The Bank and the City watchdog are already preparing tougher guidance for lending on credit cards and personal loans which will be published next month.

Consumer credit, which excludes mortgages, grew by 10.3 per cent in the year to April, the fastest rate since 2005. The total amount owed on personal loans, overdrafts, car finance and credit cards has hit more than £198.4 billion. As part of the crackdown on borrowing, lenders will have to ensure borrowers can afford a three percentage point rise in their standard variable mortgage rate – which equates to a rise to about 7 per cent. This is stricter than the current rules which allow lenders to assume a smaller increase in interest rates.

Mr Carney insisted that lenders had not been ‘gaming’ the system but that some ‘appear to be forgetting the lessons of the past’.

But last night he came under fire for not acting more quickly to curb reckless lending. Baroness Altmann, former pensions minister, said: ‘It is better late than never but I would have liked them to take action sooner. There does seem to have been an element of complacency.’

A leading debt charity also said more needs to be done to protect vulnerable households, and urged the Bank of England not to increase interest rates.

The Bank voted in favour of keeping the base rate on hold at 0.25 per cent earlier this month. But with inflation running at the highest level in almost four years, a rate hike is thought to be likely.

Mike O’Connor, head of StepChange Debt Charity, said: ‘Any increase in borrowing costs could tip households, many of which are already on a financial knife-edge, into serious financial hardship.’

The Financial Conduct Authority has already announced a number of measures to help households saddled with debt, including telling lenders to waive or cancel their interest and charges if customers are in financial difficulty.

Households on short-term fixed rate mortgage deals are particularly vulnerable to unexpected increases in interest rates, according to the Bank of England.

Almost 80 per cent of mortgages taken out last year were fixed rate deals lasting less than five years.

A price war has pushed the cost of fixed rate deals to a record low with some households paying as little as 0.99 per cent. The Bank warned that when a deal ends, it reverts to a more expensive standard variable rate mortgage, which typically charges 4 per cent.