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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.
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.
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.
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:
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.
Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read about Amanda Gillam
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