Money watchdog, the FCA, has unveiled new rules on how credit card companies should deal with borrowers with persistent debt
Millions of people trapped in long term and persistent debt are to get more help from lenders under new rules introduced this month.
A series of guidelines put forward by the Financial Conduct Authority (FCA) earlier this year have now kicked in to further support vulnerable people trapped in on-going or escalating debt.
From 1st September, anyone who is in ‘persistent debt’ for more than 18 months will be offered support with repayment plans and even the option to have their cards cancelled to prevent further damage.
Lenders may, in some cases, even waive interest, fees and charges if the amount they’re paying in these are more than the actual debt they repay each month.
At present, there are an estimated 4 million credit cardholders persistently in the red – each paying an average of £2.50 in interest and charges for every £1 they borrow.
The FCA believes the new rules will save customers between £310 million and £1.3 billion a year in lower interest charges.
What’s changing today?
The new rules officially came into force on 1st March this year, however firms were given until the 1st September 2018 to comply. The changes will provide more protection for credit card customers in recurring debt or at risk of financial difficulties.
They were put forward after an FCA investigation into 34 million credit card accounts identified patterns of debt that needed to be better managed.
From 1st September, firms will be required to take escalating steps to help once they identify someone as having been in persistent debt over 18 months – this includes advising them of debt support services in the process.
- After someone has been in persistent debt for 18+ months : Lenders must contact customers, prompt them to change their repayment and alert them to the fact that their card may be suspended if they follow the same repayment pattern.
- After someone has been in persistent debt for 27+ months : The person will be sent a reminder of the information outlined above.
- After someone has been in persistent debt for 36+ months: The lender must offer them a reasonable way to repay their balance. If customers are unable to pay, the FCA says the firm must show ‘forbearance’ and may have to reduce, waive or cancel any interest, fees or charges.
Credit card firms have also agreed to voluntary measures to allow customers to opt-out of receiving automatic credit limit increases, which can often tempt them into further worsening their debt.
Firms have also agreed not to offer credit limit increases to customers in persistent debt for 12 months. The FCA estimates will benefit 1.4 million accounts each year.
Christopher Woolard, FCA’s director of strategy and competition said: “These new rules will significantly reduce the numbers of customers with problem credit card debt. Credit cards offer customers flexibility to manage their finances and repayments, but with this there is a risk customers can build up and hold debt over a long period of time – without making much headway on the outstanding balance.
“Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly are given help.”
According to research by credit agency Equifax, young people are most at risk of being unable to manage their debt.
A worrying 12% of credit card holders aged between the ages of 18 and 24 admitted that they do not pay off any credit card debt in a typical month. When asked the reason, 42% said it was because they could not afford it.
Further to this, the Bank of England’s latest credit conditions survey identified a significant increase in default rates on credit card loans between the months of April and June 2018.
One in 10 credit card holders pay off between 1% and 10% in a typical month – while 49% will pay off their debts in full.
“Whilst nearly half of all credit card holders pay off their monthly balance in full, according to our research, that still leaves a large proportion carrying over a debt to the next month”, explained Lisa Hardstaff at Equifax.
“And if this debt then rolls over month to month, the interest accumulates turning what is essentially ‘good debt’ into unmanageable ‘bad debt’, putting individuals at risk of financial difficulties.
“The FCA guidelines are a positive step for consumers, providing a lifeline for those who find themselves simply unable to manage long-term debt. Whilst change in circumstances can often lead to debt that initially is thought to be manageable to become unmanageable, it’s also worth keeping a very clear note of credit card expenditure to ensure that the payments made can be afforded.”
If you’re in need of help, your local Citizens Advice service is a great place to start.