How can credit card holders save £££ under new rules?
6 minute read
Any credit card holders who have carried credit card debt over a significant period of time – particularly if they were only able to pay off the minimum amount due each month – will know just how expensive that can be. And, as the Financial Conduct Authority (FCA) – the UK’s financial regulatory body – has observed, there’s little incentive for credit card providers to step in and help people in that situation because those customers are “profitable”.
However, under new rules being implemented by the FCA, that profit could be drastically reduced – potentially to the tune of £1.3bn a year – representing a massive saving to borrowers.
Why is this happening?
In February 2018, the FCA released a policy statement following a credit card market study looking at persistent debt and earlier intervention remedies.
Based on their findings, they are implementing changes that are intended to cut the number of people with long-term credit card debt. The changes come into effect on 1 March 2018 and firms have six months, until 1 September 2018, to become fully compliant. Under the new regime, card providers will be obliged to follow a series of steps to assist people making minimum or near-to-minimum repayments over a number of months.
Key findings of FCA market study
The study found that in 2014, some 5.6 million people were in what was referred to as “problematic debt”. Two million of those were in arrears or had defaulted, two million had a balance consistently above 90% of the credit limit for a year or more, and 1.6 million were making only the minimum payment required. (The summary of results, and subsequent recommendations, may be seen in full here: https://www.fca.org.uk/publication/policy/ps18-04.pdf)
Drilling down from those figures, the FCA states that over 3 million credit card users in the UK fall into the category of having “persistent debt”. That is defined as a customer paying more in interest and charges than they have repaid off their borrowing, over a period of 18 months.
It’s estimated that people in this category pay £2.50 in interest and fees for every £1 they knock off the amount borrowed, and the FCA has stepped in to do something about it.
How will consumers be impacted by the package of remedies and how is this beneficial
The package of remedies, set to intervene at 18, 27 and 36 months (see below), is made up of initial help and advice, after which firm action is taken if there is no change.
When contact is first made with the customer, they are encouraged to change their repayment behaviour and to increase their monthly payments, if they are able to. The reason for this is that paying more than the minimum amount required is a small thing that has a big impact.
The FCA offers an example showing the effect paying different amounts each month can have on the duration of the debt and overall interest paid.
A customer borrows £3,000 on a card with an interest rate of 19% APR and makes no further spending on the card.
Scenario 1: If they only make minimum repayments – starting at £74 a month and gradually reducing over time – it would typically take 27 years to clear the debt, and they would pay £4,192 in interest.
Scenario 2: If they continue to pay £74 per month, every month, they will pay it off in 5 years, 2 months, and pay £1,576 in interest.
Scenario 3: If they pay £108 per month, they will pay it off in three years and pay £879 in interest.
The FCA says: “Customer stress and financial difficulties will be reduced by resolving debt problems sooner.” It expects around half the accounts in persistent debt to move to faster payments before the 36-month stage, and around 1.4 million more at that stage.
Stage 1: initial contact – customer is contacted after being in persistent debt for 18 months. Advice is offered by the card provider and the customer is also given contact details for independent sources of debt advice and counselling.
Stage 2: follow-up – if the customer continues to pay just the minimum, and the situation is the same after 27 months and looks unlikely to improve, the customer is sent a reminder; they will also be warned that their card might be suspended if the situation persists.
Importantly, the FCA was careful to point out that if anyone depended on their card for things like food, rent or mortgage, then it shouldn’t be suspended at this stage. (https://www.fca.org.uk/publication/policy/ps18-04.pdf Annex, page 8 of 11)
Stage 3: offer of cheaper repayment – after 36 months of persistent debt, the credit card provider must offer an alternative repayment method that would allow the debt to be paid off more quickly, such as transferring the debt to a personal loan, with lower interest fees and set monthly repayments over three or four years.
If they are unable to repay more quickly, the FCA say the customer must be shown forbearance, which may include reducing, waiving or cancelling any interest and fees. At the stage, the card is also expected to be cancelled.
This is where customers potentially benefit from a projected overall saving of £1.3bn a year.
Top 3 potential benefits if you’re looking for a mortgage
If you fall into the “persistent debt” category, then you could benefit from the new rules in a number of ways.
First, if your credit card debt is transferred to a cheaper personal loan, your financial outgoings will be reduced and so you might be eligible for a higher mortgage, based on the lender’s affordability assessments.
Second, if you have the interest and fees written off, you again will reduce your outgoings and so might be eligible for a higher mortgage.
Third, whether your debt is transferred to a personal loan or you have your interest and fees waived, you will have more money available to save up for a deposit, and a bigger deposit will increase your chances of acceptance for a mortgage – especially if you have a history of bad credit.
We can help
If you are affected by this situation, or you are finding that your credit history is affecting your ability to get a mortgage, perhaps because you are in a debt management plan, contact us. We have a specialist team of advisers who can help you, whatever your circumstances.