The new credit card rules for persistent debt

The money watchdog, the FCA, has unveiled new rules on how credit card companies should deal with borrowers with long term or persistent debt.

The FCA aims to save between £310 million and £1.3 billion in interest per year for credit card customers, based on the 3.3 million people who are struggling with long term debt and paying interest on credit card balances.

Measures include waiving interest and card fees for certain categories of customer who show no signs of being able to pay back their debt. The proposals come after the FCA looked at the UK credit card market and analysed the accounts of 34 million credit card customers and how they used their cards over a five-year period.

How this might apply to you

The new rules are intended to help reduce the number of people who have credit card debt that has built up over a long period of time and shows no sign of being paid off.

It particularly applies to people who only pay off the interest on their outstanding balance each month and don’t make any headway in paying off the underlying debt.

The FCA wants credit card companies to help “break the cycle of persistent debt” and intervene at an earlier stage in order to prevent debt becoming a chronic problem.

Under the measures agreed by credit card firms, customers must be able to opt-out from receiving automatic credit limit increases. Further to that, customers in persistent debt for 12 months will not be offered credit limit increases. The FCA says this should result in around 1.4 million accounts per year not receiving such offers.

What the rules say

The new rules came into force last month (March 2018), but firms have until 1 September 2018 to comply.

The FCA says that in July 2016 it concluded a study of UK credit cards (the Credit Card Market Study), and found that our competitive credit market was working fairly well for most of the 30 million consumers who have a credit card (60% of the adult population).

It said that borrowing is never risk free and many customers enjoy the flexibility of credit cards and the ability to defer or spread payment across many months.

However, not everyone was able to manage their debt effectively, and long-term levels of credit card debt might hide deeper and more serious financial difficulties.

The FCA defines “persistent debt” as someone having paid more in interest, fees and charges over an 18 month period than they have of the underlying debt.

Under the FCA’s new rules, firms must help the customer by proposing ways of repaying more quickly over a reasonable period, usually between three and four years. This might mean transferring the balance on the credit card to a lower-interest personal loan, or waiving outstanding fees and charges.

How charges mount up over time

The FCA says that customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing.

It says there are a total of 4 million accounts in persistent debt. Firms have few incentives to help these customers because they are profitable – which is why the FCA had to step in and provide some new rules.

How will the new credit card rules affect you?

If you are only making low repayments over a long period, for example just paying the minimum amount every month and not reducing the underlying debt, then your credit card provider must contact you, under the new rules.

You’ll be contacted if you have been in “persistent debt” – i.e. only paying off small amounts – for more than 18 months.

Your provider will suggest you start paying off more and may warn you that your card could be suspended if you do not change their repayment pattern.

If after 36 months you are still in persistent debt, your credit card issuer will have to offer you a way to repay your balance in a reasonable period.

Under the FCA rules they may have to reduce or cancel the interest, fees or charges that you face on your credit card account.

When to see help for problem debt

If you have money worries and are starting to use your credit card to buy essentials, or you are struggling to pay off the minimum amount each month, or are juggling credit cards, then you may benefit from some advice.

Debt counsellors are used to helping people with money issues and they won’t judge you.

Often people get into debt because of life events such as sudden illness, divorce, redundancy, loss of overtime, childbirth or disability. If you are starting to find it difficult to manage your borrowing commitments then it is time to seek help.

Never pay for debt advice – it is freely available from the following debt charities: National DebtlineCitizens Advice Bureau; and StepChange Debt Charity, which has an online budgeting and debt tool which can help you get back on track. It provides free debt advice tailored to your personal circumstances via a 20 minute online questionnaire.

If you’re looking to rebuild your credit score, consider using a bad credit credit card or a prepaid current account.