There’s no panacea for the nation’s credit card debt – but the Financial Conduct Authority is having a go at helping people languishing in continual debt.
So-called ‘persistent’ debt is a serious problem. Under the FCA’s definition, credit card customers are in persistent debt if they have paid more in interest and charges than they have repaid of their borrowing, over an 18-month period. While it’s no fun for the individual, credit card firms love these people and, surprise surprise, ‘do not routinely intervene to help them’ according to the city watchdog.
The FCA estimates that around 3.3 million people are in persistent debt, with more than half (1.8 million) for two consecutive periods of 18 months. Today’s proposals aim to address this and will require firms to take steps to help customers repay their balances more quickly and to offer further assistance to those who can’t.
Andrew Bailey, chief executive of the FCA, 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.’
It’s a nice idea. Under the plan, credit card providers should prompt any customers who have have been in persistent debt for 18 month to make faster repayments; after 18 months, if the customer is still in this situation, companies must propose a repayment plan to help them to repay their outstanding balances more quickly; and, in extreme cases when someone still cannot afford to repay their balance at a speedier rate, credit card firms should consider reducing, waiving or cancelling any interest or charges.
Good luck with that last one. Credit card companies exist for one reason and one reason only: to make money. They don’t like customers who pay off their debt in full every month; they want people who struggle to repay, the men and women who only ever pay off the interest. And if they incur charges for late payment, so much the better.
Needless to say, debt charities are wary of the regulator’s new proposals.
Mike O’Connor, chief executive of StepChange, said: ‘The FCA needs to ensure that consumers are properly protected and our concern is that these proposals don’t go far enough. Credit card debts remain the biggest single category of problem debt for our clients, with average debts of over £8,000. We welcome moves to tackle persistent debt, but we are concerned that these proposals will not fix the central issue that credit cards, which are supposed to be a short-term form of borrowing, often become long-term and expensive debt. The proposals do not address the fundamental question of how credit cards trap people in persistent debt. These measures will still potentially leave people paying back substantial amounts over extended periods of time.
‘Our clients tell us that unsolicited credit card limit increases are linked to deepening debt problems. The Bank of England is looking at lending standards and the FCA should have sent a clear message to firms that credit should be bought and not sold by banning all unsolicited credit limit increases. New protections have only been introduced for new credit cards when they should exist for all accounts.
‘Two key questions remain. How will these proposals help prevent people from falling into persistent debt? And will these interventions do enough to get people out of long-term debt?’
Credit card firms and other interested parties have until July to respond to the FCA’s new rules. With borrowing on credit cards experiencing the highest rate of growth in 11 years and UK households putting £600 million on their credit cards last month alone, our collective outstanding credit card balance is now £67.3 billion. I can’t see credit card providers giving up the interest and charges on that sum any time soon.
Helen Nugent is Online Money Editor of The Spectator
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