Credit: In whose interest?

The government is looking at consumer credit law

For some people getting credit can be difficult, if they have a poor credit history.

One company that aims to tap into this market is Vanquis Bank, which may seem a welcome relief to those excluded by mainstream lenders.

But there is a price to pay - in the form of interest of up to 58.1%.

By Penny Haslam
BBC Radio 4's Money Box

Provident Financial is one of the UK's top 100 companies, specialising in providing credit to people who may not have access to mainstream lenders like banks and building societies.

It is the biggest doorstep-lender in the country, with over 1.5 million customers, and this year it began piloting a number of different credit cards through its new company, Vanquis Bank.

The bank is deliberately targeting people who would be considered too high-risk by other companies. But Vanquis Visa is not like most credit cards. Interest rates are higher, and credit limits are lower.

Sue Brown, Development Officer at Leeds City Credit Union was one of those who got the offer through the post. She told the programme:

"I was absolutely horrified, the interest rates were astronomical for the amounts that they were offering. I just could not believe it."

People will find it hard to get out of debt borrowing these kind of amounts, in my view it is just another upmarket way of door-step credit Sue Brown, Leeds City Credit Union

For some customers, borrowing just £100 from Vanquis Bank will mean an annual interest rate of 58.1%. That includes an annual fee of £19.

But it is possible to bring the rate down, because the more you borrow, the lower the interest rate. So if someone has a credit limit of £2000, the annual interest rate could drop to 26.6%.

According to the Vanquis marketing literature, customers can therefore strengthen their credit rating.

Government intervention

But Sue Brown is worried about this strategy of encouraging people to borrow more. At Leeds City Credit Union, she has seen the problems that debt can cause.

"People will find it hard to get out of debt borrowing these kind of amounts. In my view it is just another upmarket way of door-step credit."

And Sue is not the only one who has reservations about borrowing rates of nearly 60%.

Labour MP Barry Gardiner, who follows credit card issues closely, is appalled at the high interest some customers will be charged.

"It may be legal, but it is certainly not moral. We have got people who are being charged 50-60% to borrow. And that quite simply cannot be right."

When Money Box spoke to Vanquis Bank it said that its Annual Percentage Rates are higher than most because they are targeting customers who are high risk.

I believe there should be a limit that the government imposes Barry Gardiner MP

And the bank claims that customers who manage their debts well should see a reduction in their rates after 12 months.

Barry Gardiner however, says there is no excuse for charging so much in the first place.

The government is currently looking at all aspects of consumer credit law, and Mr Gardiner wants it to address high interest rates.

"Can it possibly be right to lend money to people who have a poor credit history at these interest rates? I don't believe it's right, and I believe there should be a limit that the government imposes."

Vanquis Visa is not the only card in this market.

Barclaycard will consider cards for people who would not normally get one, with its "Initial" card at 24.9%. Capital One offers the Classic MasterCard at 29.%. And Marbles credit card is available for people with low credit scores starting at 19.9%, lower than even the lowest rate offered by Vanquis.

BBC Radio 4's Money Box was broadcast on Saturday, 11 October at 12:04 BST.