A recent fairly scathing report by the FCA identifies that around 3.3 million people are trapped by credit card debt they may never be able to clear. The FCA are critical of credit card companies who they say have done little to encourage people who are paying more interest than capital each month.
The FCA report has received wide scale publicity from all types of media including BBC Radio Manchester who invited Bev Budsworth MD of The Debt Advisor to help Mike Sweeney discuss the issues particularly of problem credit card debt on Tuesday morning 4 April 2017.
Bev pointed out that the FCA report has some really useful suggestions to prompt those who can pay more to clear credit card debts quicker plus help including the freezing of charges for those who evidence they are struggling to repay their debt. The proposals are open to consultation and it is really important that debt solution providers do participate and help get some of these proposals over the line.
The FCA defines persistent debt on credit card customers as – the interest and charges exceed payments to clear debt over an 18 month period. These customers are clearly “propping up” the profits of the credit card firms.
The FCA estimates that of the 3.3 million people who are in persistent debt, over 50% have been struggling this way for two consecutive periods of eighteen months.
Andrew Bailey, FCA Chief Executive, said:
“Credit cards can be a very effective product for consumers, but a significant minority of customers experience real difficulties. We expect our proposals to reduce the number of customers in problem credit card debt, as well as putting customers in greater control of their borrowing.
“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, and avoid persistent debt in the first place.
“The measures that we’re proposing today, alongside those already announced, are part of a package of significant improvements for credit card customers based on the comprehensive analysis of the market that we have carried out.”
The new proposals include:-
- Credit card firms must take steps to help customers repay their outstanding credit card debts quicker and
- For those who cannot afford to repay their debt, there must be proposals to help these customers.
If a customer has been in persistent debt for 18 months, firms will need to contact the customers and encourage them to make faster repayments if that is affordable. If a customer is still in persistent debt after another 18 months, firms will need to propose a repayment plan to help customers repay the debt quicker. If a customer does not respond to the repayment plan or state that they can afford to repay more but do not wish to do so would no longer have the use of the credit card – it would be suspended.
The FCA have also proposed that if a customer can’t afford to repay their balance in a shorter time frame, credit card firms will be required to assist them to reduce their term, they could do this by reducing, waiving or cancelling interest and charges. If this was to be the case it is likely that firms would suspend the credit card so the client would not be able to continue spending on it.
The FCA expects this proposal to lead to savings for customers in lower interest payments as a result of faster repayment of the debt. It is estimated that by 2030 the savings to customers would be between £3bn and £13bn, depending on how the firms and customers respond to the changes. In the long run, it would mean that fewer customers get into persistent debt over time.
In addition, the FCA are also proposing that firms who are aware that their customers are experiencing financial difficulty are contacted much earlier and helped through their situation by monitoring their repayment record .This will help firms to identify customers in difficulty and enable them to help them through it.
Bev Budsworth adds, “there are solutions available for those seriously struggling with problem debts. Problem debt is debt where the monthly repayments are eating into the money you need to live on. However, make sure you obtain advice from organisations who are regulated (by the FCA) which means they can advise on all potential solutions”
These solutions include:-
- Consolidating debt into a loan or remortgage
- Individual Voluntary Arrangement
- Debt Relief Order
- Dealing with debt yourself
- Getting help from charities or the free sector
The Debt Advisor is Authorised and regulated by The Financial Conduct Authority (reg no: 606669). This means we can advise on all appropriate solutions.
We will review your circumstances and offer advice on all options that might suit your needs.
All debt solutions need to be carefully considered. IVA’s are formal solutions and failure to keep to the terms can result in your IVA failing and you could end up bankrupt.
There is also free debt help and advice available through a variety of debt charities. For more information, we recommend you visit www.moneyadviceservice.org.uk.