Credit card customers struggling with persistent debt are to be offered extra help by lenders, under new rules introduced by the Financial Conduct Authority.
The financial regulator today unveiled rules which firms must comply with from 1 September and which should kick in after a customer has been in ‘persistent debt’ for more than 18 months. Lenders will have to ask customers about changing their repayment plan, warn them their card could be cancelled and in some cases ultimately waive interest, fees and charges.
The Financial Conduct Authority (FCA) defines someone as being in persistent debt if, over a period of 18 months, the amount they pay in interest, fees and charges is more than the amount of debt they repay.
It says there are currently four million credit cardholders in persistent debt, and they pay an average of £2.50 in interest and charges for every £1 they borrow. It estimates the new rules will save customers between £310 million and £1.3 billion a year in lower interest charges.
For help on cutting the cost of existing borrowing see our Balance Transfer Credit Cards guide.
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What are the new rules?
The new rules follow a market study by the FCA, which analysed the accounts of 34 million credit card customers over a period of five years, and surveyed almost 40,000 consumers.
From 1 September, firms will be required to take escalating steps to help once they identify someone as having been in persistent debt over 18 months:
- After someone has been in persistent debt for 18+ months… lenders must contact customers, prompt them to change their repayment and warn their card may be suspended if they follow the same repayment pattern. They must refer to any debt advice available.
- After someone has been in persistent debt for 27+ months… They will be sent a reminder of the information above.
- After someone has been in persistent debt for 36+ months… lenders must offer customers 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.
There’s no hard and fast rule over when a customer’s card may be cancelled, but it could happen if after 36 months the customer isn’t making faster repayments, they fail to keep up their repayment plan or they say the repayments aren’t possible.
While the new rules are intended to help those struggling with persistent debt, one way to reduce your credit card interest without getting a new card is what we call ‘the credit card shuffle‘ – where you shift debt to cards with lower interest rates, pay just the minimum repayment on those cards and then focus as much cash as possible on repaying the most expensive debt first.
We’ve asked the FCA if firms must take customers’ other debt into account when discussing repayment options and deciding whether to suspend credit cards and will update this story when we know more.
Credit card firms have also agreed to voluntary measures to allow customers to opt-out of receiving automatic credit limit increases, and have agreed not to offer credit limit increases to customers in persistent debt for 12 months, which the FCA estimates will benefit 1.4 million accounts each year.
Firms who break the new rules could be subject to action from the FCA.
What does the FCA say?
Christopher Woolard, 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.”