Labour proposes debt cap that would see credit card companies forced to write off billions of pounds owed by customers

Credit card companies would be forced to write off billions of pounds in long-term customer debts if Labour got into power under a policy to be unveiled at the party's conference.

John McDonnell, the shadow chancellor, will propose capping the amount of money lenders can charge in interest so that no one has to pay back more than double what they borrowed.

He will say the policy will help three million credit card holders who are “trapped by their debt”.

But with £14 billion owed by those classed as being in “persistent debt”, the policy raises questions over whether the cost of the policy would end up being passed onto other borrowers.

Mr McDonnell will use his speech at the Labour Party conference to accuse the Government of creating a “debt crisis”.

The average credit card debt owed by those in persistent debt – classed as people who have paid more interest charges and fees than their original borrowing – is £3,464 per person.

Mr McDonnell proposes a hard cap on credit card repayments of 100 per cent of borrowing, meaning no one would have to pay back more than double what they had borrowed.

The Financial Conduct Authority has estimated that lenders would lose up to £1.3 billion per year as a result.

A total cost cap already exists for payday loan companies after it was introduced in 2015 following intense pressure from politicians and the Church of England. It limited the interest that can be charged on loans of 30 days or less to £24 per £100 lent.

Mr McDonnell will say: “We have seen with payday loans, some companies were making massive profits from people’s financial difficulties. Under pressure, the Government has been forced to cap interest payments on payday loans. But more than three million credit card holders are trapped by debt.

“I am calling upon the Government to act now to apply the same rules to credit card debt.”

Mr McDonnell will commit the next Labour government to changing the law if action is not taken by the Tories.With wage growth slower than it has been since Napoleonic times, according to Mr McDonnell, household debt in the UK has reached a record level of more than £1.8 trillion.

Consumer credit debt, which includes credit cards, personal loans and the use of overdrafts, hit £200 billion for the first time since 2008.

The FCA carried out a consultation on plans to tackle persistent debt this year. A spokesman said: “The FCA has recently consulted on a package of measures to help those in persistent debt. This includes waiving or cancelling interest or charges when customers cannot afford any of the options proposed to repay their balance.”

Liz Truss MP, chief secretary to the Treasury, said: “We set up the FCA, which is ensuring credit card firms do more to help customers clear debt and, from January, rip-off charges will be outlawed. The best way to help people with their finances is with our balanced approach to the economy.

“Labour take it too far and would damage our economy, meaning fewer jobs, higher taxes and more debt. Working people would pay the price, just like they did last time.”