Struggling credit card holders could save up to £1.3bn a year under new rules that could see some switched over to cheaper personal loans and others having their interest and charges written off.
The Financial Conduct Authority (FCA) said the new regime being introduced on Thursday 1 March would significantly cut the numbers of people with problem card debt.
The regulator said more than 3 million UK credit card holders were in “persistent debt”, and typically handed over about £2.50 in interest and charges for every £1 they repaid of their borrowing. But it added that because these customers were “profitable,” card firms had few incentives to help them.
As a result, the FCA has introduced the new rules, which will force card providers to take a series of escalating steps to help people who are making low repayments over a long period.
Only making the minimum repayment on a credit card can prove hugely costly in the long run.
The regulator gave the example of someone who borrows £3,000 on a card with an interest rate of 19% APR and only makes minimum repayments – starting at £74 a month and gradually reducing over time.
Assuming there was no further spending on the card, it would typically take the customer 27 years to clear the debt, and they would end up paying £4,192 in interest – but if he or she had set their monthly repayment at £108 a month, they would have paid off the debt in three years and handed over £879 in interest.
Under the new regime, which fully takes effect from 1 September, firms must contact customers once they have been in persistent debt for 18 months. This is defined as when a customer has paid more in interest, fees and charges than they have repaid of their borrowing. The firm will have to explain the benefits of increasing their payments, and tell them about where to get debt help and advice.
After 27 months, the firm must send the customer a reminder if it looks like the situation is unlikely to improve in the coming months. They will also be given a warning that their card may ultimately be suspended if they do not change their behaviour.
Once a consumer has been in persistent debt for 36 months, their provider will have to offer them a way to repay their balance over a reasonable period – typically between three and four years. For example, this could mean transferring the debt over to a lower-interest personal loan with set monthly payments.
If the individual’s circumstances mean they are unable to repay more quickly, the firm must show the customer forbearance. This may include reducing, waiving or cancelling any interest and fees, said the FCA, which estimated the changes would save consumers between £310m and £1.3bn a year in lower interest charges.
It added: “Customer stress and financial difficulties will be reduced by resolving debt problems sooner … We expect about half of the accounts in persistent debt – 2 million – will move to faster repayments before 36 months, and around 1.4 million accounts will do so at 36 months.”
Firms that do not comply with the rules could face regulatory action.
