Credit card and loan customers are finding that money is being taken directly from their current accounts by their card providers to pay their bill, which is leaving them unable to cover other payments.
The banks are allowed to transfer the funds directly to repay credit card
debt, without permission of the current account holder.
Whilst creditors would usually have to take a debtor to court in order to force them to repay a debt, but a loophole called the Right of Set Off allows banks to transfer cash from current accounts
to a loan or credit card account if they are held with the same bank, BBC Radio 4's Money Box programme has reported.
Tony Herbert, social policy advisor at Citizens' Advice, told the Money Box that some customers are finding themselves without enough money to pay what Citizens' Advice deems "priority debts" such as mortgage payments, rent, and other essential outgoings like council tax, as a result of this practice.
In some instances, people are finding that they pension and housing benefits have been removed from their account without any warning, and the practice is having a "profound impact" on some people, Mr Herbert said.
Robert Skinner, chief executive of Banking Code Standards Board, told the Money Box that while these cases are "regrettable", and Right of Set Off should not be used to the detriment of a customer's ability to pay priority payments, it is up to the customer to approach their bank if they are having difficulty keeping up with their loan or credit card repayments. Citizens Advice
has reported a 25 per cent rise in the number of these cases in the last two years.
And this could be set to worsen, as in the period of April to November 2008, the CAB saw a 125 per cent increase in redundancy enquiries, and a 66 per cent increase in Job Seekers Allowance enquiries, pushing up the level of unpaid debts. Each day, it currently deals with 450 new cases of people who are struggling with mortgage
arrears, and 475 new redundancy enquires.
Citizens Advice urges those affected by the practice of Right of Set off to open a basic bank account with another provider and have their benefits paid into that so that their credit card or loan provider cannot gain access to their money. Compare current accounts »
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