At the beginning of March the Financial Conduct Authority (FCA) introduced new rules which have forced credit card providers to take a series of steps to help people who are making low repayments on their credit card debt.
The FCA stated that over 3 million UK credit card holders were in persistent debt and typically handed over about £2.50 in interest and charges in every £1 they repaid of their borrowing. It is said that because these customers in permanent debt were ‘profitable’, the credit card companies had few incentives to help them.
The regulator predicted that up to 1.3 billion a year of debt can be saved by customers under the new rules that could see debtors switch over to cheaper personal loans, with others having their interest and charges written off.
Only making the minimum payment on a credit card can prove hugely costly in the long run due to the amount of interest and charges that are applied to that particular debt.
The FCA have given an 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 take the customer 27 years to clear the debt and they would end up paying £4,192 in interest. However, if he or she had set their monthly repayments at £108 per month they would have paid off the debt in 3 years and paid only £879 in interest.
The new regime takes full effect from September 1st when credit card companies must contact customers once they have been in persistent debt for 18 months. ‘Persistent debt’ is defined as when a debtor has paid more interest, fees and charges than they have repaid for their borrowing. The firm will have to explain the benefits of increasing their payments and tell them about where to get to help and advice.
I believe the principal intention of the new regime is valid however I have some concerns. At the point when the credit card company contacts the debtor to explain their monthly payments must be raised there should be more of an emphasis on looking at their debt position as a whole. That customer may well be insolvent and require a more formal restructuring of all of their debts, not just that particular credit card debt. It may well be that a debtor in persistent or unmanageable debt may need a solution such as an Individual Voluntary Arrangement (IVA) or even bankruptcy.
Very often when I see a debtor at this stage it is useful to complete an Income/Expenditure calculation, otherwise known as a Financial Statement. This will give us a clear idea as to whether the total unsecured debts of that person are manageable. Sometimes, the debts are manageable and it may be in the debtors interest to protect their good credit rating. However, it is always a balancing act and sometimes it is clear that some debtors even if they have good credit rating are on the point of default and they should look at all available options which can include an IVA or even bankruptcy.
It is vital for those who are struggling with unmanageable debts to instruct a specialist debt solicitor who can look at your situation and advise on the best option going forward. Farleys Solicitors can help. Call us on 0845 287 0939 or contact us online today.