Regulator warns lenders against suspending credit cards for all those in persistent debt
The financial regulator has written to credit card firms telling them to review how they treat customers in 'persistent debt', amid fears some lenders are planning a 'blanket' suspension of cards.
Under rules from the Financial Conduct Authority (FCA), which came into force in September 2018, firms are required to take escalating steps to help customers they identify as being in 'persistent debt' for 18+ months. 'Persistent debt' means you pay more in interest, fees and charges than you do in clearing the debt – which often applies if you pay interest on your credit card and only ever make minimum repayments.
Yet the FCA has now expressed concerns that some lenders may cancel or suspend credit cards for everyone in persistent debt, even if they are willing to come to a repayment agreement.
It's written to credit card firm bosses to remind them they must offer customers repayment plans, and that they can only suspend or cancel cards if they have an "objectively justifiable reason".
The regulator says that if customers can't afford the repayment options, firms should treat them with "due consideration" – which could include reducing or cancelling interest and charges.
If you're struggling with debt, don't wait for your bank to contact you – get help now. See our Persistent Debt Help guide for more info.
Martin: 'Today's letters help a little bit, but not enough'
Speaking on BBC Radio 5 Live today, Martin Lewis, founder of MoneySavingExpert.com, said: "If you have one credit card, you pay the minimum repayments on it, and that is your only debt, I would absolutely agree we should try and push you to clear as much as you can of it.
"But if you have multiple debts – a couple of credit cards, an overdraft (and from April the new standard overdraft rate is 40%, which is double a high-street credit card) – then the correct strategy is to pay the minimum repayments on all the debts except the one with the highest interest rate, which could be your overdraft, and to use all your spare cash to clear your most expensive debt.
"Many people who are in persistent and problem debt have more than one debt product, and therefore encouraging them to pay more than the minimums on all of those products – which is what the regulator's done – actually has a perverse impact. They're not getting rid of the most expensive, dangerous debt – they're spreading it about on all the cards, and that's the wrong strategy.
"So I think it's a blunt tool. What you should be doing is called avalanching, which is simply listing all your debts in order, paying all your spare cash to the highest interest one that's accruing the most quickly, and paying the minimums on everything else.
"But then you get one of these letters, saying 'if you don't start paying more than the minimum, we might have to cut you off'. I'm hoping that if you were to call up your bank and say you want to prioritise your other debts and keep your minimum repayments with it, that it'll play along easily – but I don't think it will.
"And especially with the changes to overdrafts in April, people should be focusing on clearing their overdrafts – not their credit cards. So I think this is a mistake, and the regulator needs to look at it. The letters it's sending out today help a little bit, but they don't help enough."
What are the rules around persistent debt?
The FCA brought in its rules on persistent debt after it carried out a market study which analysed the accounts of 34 million credit card customers over a period of five years, and surveyed almost 40,000 consumers. The rules require firms to take escalating steps to help once they identify someone as having been in persistent debt for over 18 months:
- After someone has been in persistent debt for 18+ months. Lenders must contact customers, prompt them to change their repayments 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 a customer ignores or refuses the offer of an affordable repayment plan, the lender must suspend or cancel their card - 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 (though the card could still be cancelled).
Firms that break the rules could be subject to action from the FCA.
What has the regulator told lenders today?
We're now approaching the 36-month milestone (in September 2018, firms had to identify those already in persistent debt for 18+ months). So credit card firms will need to take action to help those who have been in persistent debt for three years.
But the FCA's letter to firms sets out some of its concerns about how they approach their customers in persistent debt. These are:
- That firms may suspend or cancel credit cards for everyone in persistent debt, even if the customer is willing to come to a repayment agreement.
The FCA says firms aren't allowed to suspend credit cards unless they have an "objectively justifiable" reason to do so – though there are some situations where they must act, and we've more on what that means below.
- That some customers may not respond to communications from their credit card firm. The FCA says firms must encourage customers to speak to them to discuss repayment plans, and that any communications should ask the customer to make contact to clarify their situation.
- That firms are proposing repayment options that aren't "reasonable and sustainable" for customers. The FCA says the debt must be repaid in a reasonable period, which would usually be between three and four years. And it's encouraging firms to make customers aware that they could be entitled to have interest and charges reduced or cancelled.
The FCA is also reminding firms that they must provide customers in persistent debt with details of not-for-profit debt advice services, and encourage them to contact these bodies. The FCA says customers are particularly likely to benefit from independent advice if they have persistent debt with more than one provider.
The FCA has warned credit card companies not to roll out "blanket" suspensions to customers who have been in persistent debt for 36 months, and says that customers must first be offered a repayment plan.
However, your cards must be suspended or cancelled if:
- You don't respond to the proposed repayment plan within the timeframe specified by the firm.
- You refuse to make increased payments even though these are affordable. If you respond to the proposed repayment plan and show that it is unaffordable for you, your lender must show "forbearance" and may have to reduce, waive or cancel any interest, fees or charges - though the regulator says that in this situation, you should be prepared for your card to be suspended or cancelled. An exception to this would be if you rely on your card for essential spending, meaning cancelling it would have a significant adverse effect on you.
If a firm does suspend or cancel your credit card, it must tell you and provide an "objective justification" for why it's done so. This justification can't rely on the fact that you are in persistent debt.
How to cut your credit card interest
If you're in persistent debt and only just managing to make minimum repayments, don't wait for your lender to contact you offering help – there are ways you can reduce the interest you pay on your credit card and funnel more money into paying off the debt itself.
The main way to do this is to get a balance transfer card. This lets you pay off or reduce the debt on your existing credit card, so you owe the new card instead – but at 0% interest, so your repayments will go towards clearing the balance. Small balance transfer fees may apply for some cards, and this may not be possible for those with poor credit scores.
See our Balance Transfers guide for full info and our current top picks. If you apply for a balance transfer, you'll be credit-checked – use our eligibility calculator before you apply to see which cards you're likely to be accepted for.
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.
For full help on how to cut the cost of debt – including where to go if you're really struggling – see our Persistent Debt Help guide.
What does the FCA say?
FCA executive director of supervision for retail and authorisations Jonathan Davidson said: "My advice to consumers is don't bury your head in the sand. If you can't afford to meet the repayment schedule that the credit card firm is suggesting, don't be afraid to tell them. If we find firms are not offering their customers the appropriate level of help, we will not hesitate to take action.
"If the firms do this right, we estimate that this could save customers up to £1.3 billion a year in lower interest charges."