Britain has a bit of a credit card problem. As of the start of the year, Brits owed a collective £72.5bn on credit cards, with hundreds of millions being added to the balance each and every month. Across the UK, the average household accounts for £2,688 of unpaid credit arrears.
Why is this? Well, with the cost of living rising and wages staying where they are, the average Brit is feeling the strain more than ever — which means more people are turning to loans and credit cards and getting themselves into trouble by accumulating more and more debt.
In March 2018 the Financial Conduct Authority (FCA) introduced new rules to help consumers with debt. This article discusses what those rules are, their aims and how they might affect you.
Who does this apply to?
The FCA identified a problem area of credit card customers in persistent debt or at risk of financial difficulties. Because of the punitive cycle that those in ‘problem debt’ found themselves in, figures showed that persistent debt customers were paying an average of £2.50 in interest for every £1 of borrowed money repaid.
Statistics like this were enough to show that changes needed to be made to help break the cycle of persistent debt, and that credit card firms should be helping those who couldn’t repay quickly instead of drowning them further.
What are the rules?
Under new rules, credit card firms are required to take a ‘series of escalating steps’ to aid customers who are currently paying off small amounts over long periods. This process comes into play once a customer has been in persistent debt for 18 months, at which point a firm should contact the customer to encourage changes in their repayment plan or otherwise have their card potentially suspended.
Should persistent debt last over 36 months, providers are obligated to offer the customer a method to repay their balance over a reasonable period. If repayment is still impossible then providers must show the debtor some ‘forbearance’, which may mean reducing, waiving or cancelling interest or additional fees.
Credit card firms have also undertaken voluntary changes to their credit limit process, where users with over 12 months of persistent debt can be denied credit limit increases as to avoid further escalation of debt.
The rules were installed on March 1st, 2018, with businesses given until September 1st, 2018 to be fully compliant.
How does this affect you?
If you are one of the four million in persistent debt, the rule changes are designed to help you get out of the repayment quicksand. The FCA estimates its changes will save consumers between £310m and £1.3bn a year in interest charges, which could be enough to help many individual customers escape problem debt.
Requiring credit card firms to actively participate in helping their customers pay off their debt should help promote better spending habits and help consumers to carefully plan their personal budgets. Overall, it’s a positive step by the FCA, and one which should help remove the heavy burden of inescapable debt for many UK customers.
This is a collaborative post