Credit card customers in persistent debt to get more help

Credit card customers who are in persistent debt should receive more help from providers to clear it, the financial regulator has said today.

Around 3.3million Britons are described as being in persistent debt – paying more in interest and charges than they have repaid on their borrowing over an 18-month period.

These credit card customers are profitable for banks and other financial firms, the regulator said, and they rarely step in to help them.

Credit headache: Customers in persistent card debt could have interest and charges waived

The cost of persistent debt is high. The Financial Conduct Authority estimates that for every £1 repaid, it costs a customer £2.50.

Credit card providers are able to make a healthy profit from these customers so there is often no incentive for them to try and help customers clear their debt fully.

The regulator has proposed a set of new rules to help those affected.

When a customer is in persistent debt, providers will be required to prompt them to make faster payments if they can afford to do so.

If a customer is in persistent debt for two consecutive 18-month periods, credit card providers will need to take steps to help the customer, such as proposing a repayment plan. 

For those who do not respond, or those who can’t afford to make faster payments, the card may be suspended.

Providers also need to help customers who are unable to pay their debts off by the above steps by reducing, waiving or cancelling any interest or charges on the card – by which point the card will have been suspended.

By following these actions, the regulator says customers will be able to clear their debt at a faster rate because they won’t be paying out as much in interest.

Through these new rules, the regulator estimates that savings to customers will reach a total of between £3billion and £13billion by 2030.

The regulator has also said providers must intervene at an earlier stage for customers in persistent debt and use the extensive amount of data available to them to identify these customers and take appropriate action.

There will also be a change to the way credit card limits are confirmed. New customers will be given a choice over how their limit is changed while it will be easier for existing customers to decline an increase.

Rising debts: The regulator says around 3.3 million are in persistent credit card debt in the UK

Rising debts: The regulator says around 3.3 million are in persistent credit card debt in the UK

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 consultation into these charges is now open and will close on 3 July. 

After this date a final set of rules will be confirmed.

It follows on from news last week that Britons spent 9.3 per cent more on credit cards in February this year than they did a year ago.

The rate of spend on credit cards is now at its highest level since February 2006, according to the Bank of England, and the outstanding amount is now £67.3billion. 

This is the highest amount on record and some £10billion higher than just two and a half years ago.

This surge in credit card debt has fuelled fears that households are living beyond their means and the UK is headed for another financial crisis.