Crackdown on credit cards

Trade Secretary Patricia Hewitt warned of a 'downward spiral of debt and despair' as consumer borrowing continues to soar.

With personal debt at a high of more than £168billion, families are at risk in the run-up to Christmas.

As many as 900,000 people are expected to have difficulties repaying credit card debts in the coming year.

The warnings came as the Government published a White Paper proposing a new Consumer Credit Act that will crack down on exploitation through personal loans and credit cards.

Details were announced at a London press conference which heard how money is being thrown at borrowers by irresponsible lenders.

A schoolboy was allowed to run up a £300 overdraft by his bank which charged interest of 17.9 per cent, and a man who borrowed £9,750 over ten years faced an ultimate bill of more than £107,000.

A 15-year-old girl was forced into prostitution to pay off family debts to an illegal money lender.

The new proposals target credit cards which hide high interest rates and charges in the small print, unfair penalties on personal loans and loan shark bullies.

High Street banks face fines if they lend irresponsibly, for example offering money to students or others who cannot hope to meet repayments and so face losing their home.

Miss Hewitt said people are borrowing 30 times as much today as 30 years ago, when the current Consumer Credit Act was drawn up.

'It has never been easier to get a loan,' she said. 'Thirty years ago there was just one kind of credit card, now there are more than 1,300.

'Used in the right way, credit is a very good thing. Almost all of us rely on it to help us handle our personal finances.

' But used in the wrong way, particularly by the very vulnerable, it can set people on a downward spiral of debt and despair.' The Minister revealed that she cut up her own credit card after getting into debt.

She said: 'Years ago, I had a credit card and used it to do a fair amount of shopping over a year or two. I was only making minimum monthly repayments, and I then realised I was paying enormous interest charges every month.

'A financial adviser told me to get a personal loan from the bank at a good rate of interest and pay off the whole of the credit card. I did, and I also chopped up the card.

'I now use a charge card and a debit card. I don't have any credit cards and that way I avoid the temptations.' Asked if others should follow suit, she added: 'Most people pay off their credit cards in full every month. In that way they get the benefit and convenience of effectively an interest free loan for a couple of weeks.

'I think people should make their own decisions.' Consumer groups welcomed the proposals, though they do not go as far as some critics wanted.

The chief executive of Citizens' Advice, David Harker, said debt levels are alarming.

'We have seen a 44 per cent increase over the past six years in people with debt problems. Some owe more than £ 100,000, excluding mortgages, some owe 14 times their monthly salary, and 23 per cent don't know how much they owe. Twenty five per cent of people with debt and credit struggle to make repayments from time to time. The current regulatory system is just not up to the job.'

Lib Dem trade spokesman Malcolm Bruce said the Government was doing too little.

He said: 'For those already neck-deep in debt the measures outlined in the White Paper will come too late.

'Millions have borrowed far beyond their means on the basis of favourable interest rates, and any rise will inevitably spell financial ruin. The knock- on effect to the economy will be profound.'