It’s not that difficult to get into trouble where credit cards are concerned. From unsolicited credit limit increases, to cards that don’t come with proper affordability checks, credit – and lots of it – is often very freely available. The consequences of this are becoming obvious, as increasing numbers of people in the UK find themselves in persistent credit card debt. This is the kind of debt that is almost impossible to pay off and new Financial Conduct Authority (FCA) rules (that had to be implemented by 1 September) have been designed to try to help find a way out.
What’s the current situation?
There are more than six million people in persistent credit card debt in the UK. This is essentially debt that is being serviced but not paid off. So, it could be a balance of several thousand pounds on which someone is only ever making the minimum payment. As a result, any payments made go towards the bank’s interest costs and not towards reducing the balance on the credit card. Many of these people fall into younger age brackets – for example, research by Experian found that 12% of credit card holders aged between the ages of 18 and 24 don’t pay off any credit card debt in a typical month. Almost half of these people said they simply couldn’t afford it.
What will the new rules do?
As of September this year there is now more protection for those who are in financial difficulties or who are struggling with persistent credit card debt. The rules are designed to help those who are simply servicing their debts, for example paying £2.50 in interest and charges for every £1 they borrow. The FCA has said that it hopes the new rules will translate to savings for customers of between £310 million and £1.3 billion a year in lower interest charges.
As a result of the new FCA rules, lenders are required to take a little more responsibility for borrowers who are seriously struggling with their debt. That includes a timetable defined by the FCA that escalates issues based on how long the individual has been in persistent credit card debt.
- 18+ months in persistent credit card debt – at this stage a lender is required to make contact with a customer and let them know that, unless they change their debt behaviour, their card is likely to be suspended.
- 27+ months in persistent credit card debt – after just over two years struggling with debt, customers will be sent a reminder of the above information by the lender.
- 36+ months in persistent credit card debt – this is the point at which the FCA requires lenders to be more proactive in terms of solving the situation. Lenders should offer borrowers a reasonable way to repay the balance on the card, which could include switching the credit card to a loan. Lenders will also be required to demonstrate ‘forbearance,’ which may mean cancelling interest, reducing fees or waiving charges, for example.
Do the new FCA rules go far enough?
Many people believe that they don’t and some experts have highlighted that the changes are really too little, too late. Given the size of some current interest rates, getting debt free can be serious challenge that these new rules do little to support until there has been persistent debt of at least 36 months. For example, a typical credit card debt of around £3,000 would take around 27 years to pay off if the customer only ever made the minimum payment. It has been suggested that the rules should have gone further to include:
- Higher monthly minimums – paying more off each month so that the balance is being reduced, as well as interest payments made.
- Fixed monthly minimums – as the balance goes down, minimum payments do too but a fixed monthly minimum that remained the same would mean the balance was cleared more quickly.
- More stringent affordability checks – whether or not someone can afford the debt that they take out is a key issue and current affordability checks are viewed as inadequate by many, particularly given the issues that many people now have with the amount they have borrowed.
- Opting out of unsolicited credit increases – some credit card firms have already agreed to voluntary measures that allow customers to opt out of automatic credit increases to help stop a bad debt situation from getting worse. Many hope that this will become more widespread.
Issues with credit card debt in the UK are nothing new. However, the FCA is making the first move towards trying to turn the situation around with these positive steps that at least send the right message.
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