CAPPING the interest repayable on credit cards would do little to tackle the personal debt crisis brewing in the UK, it was claimed this week after the Labour Party unveiled its headline-grabbing proposal at its annual conference.

Despite this, campaigners welcomed the renewed political focus on the £200 billion personal debt mountain and urged the Financial Conduct Authority (FCA) to toughen up its proposed reforms to card borrowing.

Shadow chancellor John McDonnell told Labour's conference that limiting interest payments to 100 per cent of a loan would help three million credit card borrowers "trapped by their debt".

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The proposal echoes the total cost cap on pay-day loans, which limits interest to £24 per £100 lent and was introduced in 2015 following widespread political pressure.

But the FCA has already rejected the idea, which it says would cost lenders up to £1.3bn a year, in its proposed reforms. The regulator estimates that 3.3 million credit card customers are in persistent debt, meaning they are paying more in interest and charges than in loan repayments, and they pay on average £2.50 for every £1 repaid.

It is proposing a faster repayment regime for those in persistent debt after 18 months, and a repayment plan with a borrowing freeze as well as a waiver of further charges if necessary after a further 18 months.

Mike O’Connor, chief executive of StepChange Debt Charity, said he welcomed the focus on persistent debt, but added that action was needed to prevent people being trapped in the first place.

"With credit cards, increasing the levels of minimum repayments and fixing minimum repayments so that they don’t decrease alongside the balance are simple and low cost ways that this could be achieved,” he said.

“We urge the FCA to consider these proposals as part of its forthcoming remedy package."

At present, the minimum monthly card repayment amount is typically one per cent of the loan, so it decreases as the outstanding loan reduces. Repaying only the minimum, a £3,000 card debt at 17.9 per cent would take 27 years to clear at an interest cost of £4,000. If the initial £70 monthly repayment was fixed throughout, however, the debt would be cleared in seven years with only £1,500 of interest.

The FCA has noted that lenders find struggling borrowers "profitable" so have little incentive to intervene.

Mr O'Connor added: “With levels of outstanding borrowing approaching levels not seen since the economic crisis and households increasingly vulnerable, debt is an issue that needs to become a priority for policymakers now."

Andrew Hagger, founder of advice site Moneycomms, said he suspected little thought had been given to how a cap would work in practice.

"For a start the 'you won’t pay more than double' ruling should only be applied if a person is in dire financial difficulties with no means of repaying the debt,” he said.

“However, card companies and debt charities already often arrange for interest to be frozen/suspended in these circumstances anyway. The other thing is that a credit card balance isn't made up of a single transaction, the balance continually fluctuates - so how would you set the starting point for this measure to kick in?"

Mr Hagger added: “If the Labour Party wants to look at things that really hurt borrowers then perhaps they should look at the cost of unauthorised current account charges where the cost is far higher than with credit cards.”

FCA chief executive Andrew Bailey last week said that 'gig economy' workers, who need credit to smooth their incomes, helped explain why consumer credit has ballooned by 10 per cent to £200bn in the last year while real wages have slipped by 0.4 per cent.

Meanwhile, half of all card borrowers are on zero per cent interest deals, allowing them to roll over debts and postpone repayment for up to three years on each card, and 17 new cars out of 20 are now being bought on personal contract purchase deals.

In July, the FCA said it would crack down on the high cost of overdrafts and review the booming car loan market.

Last month Citizens Advice reported that 18 per cent of people struggling with debts had seen their credit card limit automatically increased – compared with only 12 per cent of cardholders in general. The charity said "irresponsible behaviour by some lenders is making people's debt situation worse " and called for a ban on increases without a cardholder's explicit consent.

UK Finance has responded that the industry "has already developed a number of proposals to address the regulator's concerns and ensure that no customer in persistent debt will be offered a credit limit increase".