New Credit Card Laws

Persistent Credit Card Debt: What Lenders Must Do

Credit cards can provide useful short-term flexibility, but paying only the minimum amount each month can leave a borrower in debt for many years.

A customer is generally treated as being in persistent credit card debt where, over 18 months, they have paid more in interest, fees and charges than they have repaid from the amount originally borrowed.

The rules also apply to certain store cards and catalogue credit accounts.

Why Minimum Payments Can Be Expensive

A minimum payment usually covers:

• the interest charged during the month;


• any fees or charges; and


• a relatively small amount of the outstanding balance.

This means the customer may continue making payments while reducing the actual debt very slowly.

For example, MoneyHelper estimates that a £2,000 balance on a card charging 22% APR could take around 14 years to repay if only minimum payments are made.

Paying a fixed amount above the minimum, where affordable, can significantly reduce both the repayment period and the total interest charged.

The FCA Persistent-Debt Rules

The Financial Conduct Authority introduced rules requiring credit card providers to identify customers whose debt is becoming persistent and to take steps to help them repay it more quickly.

The rules came fully into effect in September 2018.

They replaced the need for the proposed total cost cap discussed in earlier political announcements. However, lenders may still be required to reduce or cancel interest and charges where a customer cannot afford increased repayments.

What Happens After 18 Months?

If a customer has paid more in interest, fees and charges than they have repaid from the balance over the previous 18 months, the lender must contact them.

The lender must normally:

• explain that the account is in persistent debt;


• explain the benefits of increasing repayments;


• show that continuing to pay at the current level will increase the cost and repayment time;


• ask whether the customer can afford to pay more;


• encourage the customer to discuss their financial circumstances;


• warn what may happen if the position continues; and


• provide details of free debt advice organisations.

The lender should not simply demand unaffordable payments. Any increase must take account of the customer's financial circumstances.

What Happens After 27 Months?

Approximately nine months after the first persistent-debt communication, the lender must review the account again.

If the customer appears likely to remain in persistent debt when the full 36-month period is reached, the lender must send a further warning.

This gives the customer another opportunity to:

• increase their repayments;


• stop further spending on the card;


• agree a repayment plan;


• discuss financial difficulties; or


• seek free and independent debt advice.

What Happens After 36 Months?

If the customer remains in persistent debt for two consecutive 18-month periods, the lender must take stronger action.

The lender must normally offer ways for the balance to be repaid more quickly and within a reasonable period.

This may include:

• a fixed repayment plan;


• higher monthly payments that remain affordable;


• transferring the balance to a lower-interest loan;


• reducing the interest rate;


• waiving or cancelling interest and charges; or


• another arrangement suited to the customer's circumstances.

A reasonable repayment period will commonly be around three to four years, although the appropriate period depends on affordability.

If the Customer Cannot Afford to Pay More

A customer should tell the lender immediately if increased repayments are unaffordable.

The lender must consider appropriate forbearance. This can include:

• reducing interest;


• waiving interest;


• cancelling fees and charges;


• accepting lower affordable payments;


• agreeing a temporary repayment arrangement;


• freezing the account to prevent further borrowing; or


• referring the customer to free debt advice.

The lender should not pressure a customer into making payments that leave them unable to meet essential household costs.

Can the Credit Card Be Suspended?

A lender may suspend or cancel further use of the credit card where persistent debt continues, and the customer does not engage with the proposed repayment options.

Suspension is intended to prevent the balance from continuing to increase.

However, the lender should consider whether suspension would have a significant adverse effect, particularly where the customer relies on the card to pay essential expenses.

The customer will still owe the existing balance even if the card can no longer be used.

There Is No General Total Cost Cap

The proposal that credit card customers should never pay more in interest and charges than the amount originally borrowed was not introduced as a general rule.

This differs from high-cost short-term credit, such as payday lending, where specific price-cap rules apply.

A credit card customer may therefore still pay more in total interest and charges than the original amount borrowed, particularly where the balance remains outstanding for many years.

The current rules seek to prevent this by requiring intervention and affordable repayment arrangements rather than imposing a universal cap.

What Should You Do After Receiving a Persistent-Debt Letter?

Do not ignore the letter.

Check:

• the outstanding balance;


• the interest rate;


• the amount paid in interest and charges;


• the current minimum payment;


• whether the card is still being used;


• how much can realistically be paid each month; and


• whether other debts or household bills are also becoming difficult.

Contact the lender and explain your circumstances honestly.

If you can afford to pay more, consider setting a fixed monthly payment above the minimum rather than allowing the payment to reduce as the balance falls.

Should You Transfer the Balance?

A balance-transfer card may reduce interest where the customer qualifies for a lower or 0% introductory rate.

Before transferring, check:

• the transfer fee;


• the length of the introductory period;


• the interest rate after the offer ends;


• the amount that can be transferred;


• whether purchases attract a different rate;


• the required monthly payment; and


• whether the debt can be cleared during the promotional period.

A balance transfer will not solve the problem if the original card is then used again and additional debt is created.

Repeated credit applications can also affect thecustomer'ss credit record.

Priority Debts and Essential Bills

Credit card debt is normally an unsecured non-priority debt.

A customer should not pay more to a credit card if doing so means falling behind with essential liabilities such as:

• rent or mortgage payments;


• Council Tax;


• gas and electricity;


• court fines;


• child maintenance;


• secured loans;


• tax liabilities; or


• essential food and household costs.

Free debt advice can help establish which debts should be dealt with first.

Interest and Charges During a Debt Plan

A creditor may agree to freeze or reduce interest and charges during a repayment arrangement or debt management plan.

However, interest is not automatically frozen in every informal debt plan.

The customer should ask for written confirmation of:

• the agreed monthly payment;


• whether interest will continue;


• whether charges will be added;


• how long the arrangement will last;


• whether the account will be defaulted;


• how the arrangement will be recorded with credit reference agencies; and


• when the arrangement will be reviewed.

Effect on Your Credit Record

Entering a reduced payment arrangement, missing payments or having an account default can affect the customer's credit record.

This may make it more difficult or expensive to obtain:

• loans;


• mortgages;


• mobile telephone contracts;


• car finance;


• rental accommodation; or


• other forms of credit.

However, protecting essential household spending and preventing the debt from increasing may be more important than preserving access to further borrowing.

Breathing Space

Eligible people in England and Wales may be able to enter the Debt Respite Scheme, commonly known as Breathing Space.

A standard Breathing Space can provide temporary protection from:

• most interest and charges on qualifying debts;


• creditor contact demanding payment;


• certain enforcement action; and


• some additional recovery costs.

Breathing Space does not write off the debt, and ongoing liabilities generally still need to be paid.

An application must normally be made through an authorised debt adviser.

Complaining About a Credit Card Provider

A customer may complain when a lender:

• fails to identify or respond to persistent debt;


• demands unaffordable payments;


• refuses to consider financial difficulty;


• continues excessive interest or charges without considering forbearance;


• provides misleading information;


• handles the account unfairly; or


• fails to respond properly to a complaint.

The complaint should first be made directly to the lender.

If the complaint is not resolved, it may be possible to refer it to the Financial Ombudsman Service, subject to its rules and deadlines.

Free Debt Advice

Free and confidential advice is available from organisations including:

• StepChange Debt Charity;


• National Debtline;


• Citizens Advice;


• MoneyHelper; and


• local authority or community debt advice services.

Be cautious about commercial debt-management businesses that charge substantial fees for services available free elsewhere.

How a Debt Solicitor Can Help

A solicitor may assist where:

• the debt is disputed;


• court proceedings have been issued;


• a County Court judgment has been obtained;


• the lender has failed to comply with consumer credit law;


• the credit agreement may be unenforceable;


• there are allegations of irresponsible lending;


• a charging order or other enforcement action is threatened;


• the customer is considering insolvency; or


• there is a complex complaint involving substantial loss.

For ordinary budgeting and repayment difficulties, a free regulated debt adviser may be the most suitable first contact.

Persistent Debt Requires Early Action

Persistent credit card debt is expensive because a large proportion of each payment is absorbed by interest and charges rather than reducing the balance.

The FCA rules require lenders to intervene, but borrowers should also act promptly. Ignoring persistent-debt letters can result in the card being suspended while the existing debt remains payable.

Contact the lender, prepare a realistic household budget and seek free debt advice where increased payments are unaffordable.

Finding a Debt Solicitor

Use the search facility at the top of this page to find a solicitor experienced in consumer credit, disputed debts, court claims or debt enforcement.

This article provides general information about credit card debt in the United Kingdom. It does not constitute legal, financial or debt advice and should not replace advice about an iindividual'sfinancial situation.