Is this the end for long-term minimum credit card repayments?

New measures to encourage consumers to pay back credit card debt more quickly

 

The Financial Conduct Authority (FCA) is proposing new rules for consumers who are in “persistent” credit card debt. 

 
Customers are considered to be in persistent debt if, over an 18-month period, they have cleared less off their borrowing amount then they have paid in interest and charges. The FCA has created persistent debt as a definition as a way to acknowledge that not all customers paying minimum credit card payments are necessarily in financial difficulty. 
 
The FCA estimates that around 3.3 million people are in persistent debt. 
 
Andrew Bailey, FCA Chief Executive, said:
 
“Persistent debt can be very expensive - costing customers on average around £2.50 for every £1 repaid - and can obscure underlying financial problems. Because these customers remain profitable, firms have few incentives to intervene. We want to change this situation so that firms and customers will deal with outstanding debt more quickly.”
 
The proposals focus on firms to taking steps to ensure customers repay their balances more quickly or offer assistance to those who can’t.
 
The new proposals at a glance: 
 
At 18 months customers considered in persistent debt would be made aware that increasing their rate of repayment would reduce their cost of borrowing and that continuing repaying at the same rate for another 18 months may mean the firm suspends use of the card and makes a report to a credit reference agency such as Experian. They would also provide the customer with the contact details of not-for-profit debt advice. 
 
At 36 months credit card companies must write to the customer proposing options for a repayment plan based on repaying their balance over a three and four year period. The interventions would continue until the customer has repaid the balance they had at 36 months, but this does not stop them spending on the card. This is intended to provide customers with an incentive to accept the repayment plan.
 
Firms would be required to take reasonable steps to ensure that customers do not get into persistent debt in relation to new balances, though the FCA has not told credit card companies how they should do this. 
 
Customers who can afford to make increased repayments but decline to do so, or those who do not respond to the firm would have their use of the card suspended or cancelled. 
 
Clients who cannot afford the repayment plan must be shown “forbearance”. This may include a reduction in the interest rate or charges. They will also have the use of their card suspended, with the FCA believing that customers in this scenario will have very little additional disposable income so would not be unable to get high cost credit elsewhere. In addition, it is likely that suspending the customer’s use of the card would be reported to Credit Reference Agencies, in which case other lenders would likely be aware of the customer’s circumstances.
 
The FCA wants firms to comply with the rules 3 months after they come into force and not wait another 18 months before assessing their customers’ accounts. They also would like firms to take action when they suspect someone is at risk of financial difficulty and take appropriate action, even if they have not have missed a payment. 
 
David Rodger, CEO of Debt Advice Foundation said;
 
“Credit cards are the biggest proportion of debt for most of our callers, so we welcome any proposals which will incentivise credit card companies to help people get out of debt more quickly. As stated in the consultation paper, credit cards can be effective for short-term borrowing but are an expensive way of borrowing large amounts over an extended period.”
 
The FCA consultation will close on 3rd July 2017.