Thought leadership

Credit cards firms must do more to help millions of customers in persistent debt, the financial regulator has said. The Financial Conduct Authority (FCA) has published proposals that could mean credit card companies cancelling any interest or charges in extreme cases.

Firms would have to work more closely with people in debt, such as drawing up a faster repayment plan.

FCA chief executive Andrew Bailey said the proposals should put “customers in greater control”. The UK Cards Association, which represents credit card companies, said that plans required “careful consideration”.

The regulator defines someone as being in credit card debt if they have paid more in interest and charges than they have repaid of their borrowing over an 18-month period.

The FCA says that “customers in persistent debt are profitable for credit card firms, who do not routinely intervene to help them”. It estimates that 3.3 million people are in persistent debt.

‘Real difficulties’

The plan means:

  • When a customer has been in persistent debt for 18 months, credit card firms should prompt them to make faster repayments, if they can afford it
  • If a customer is still in persistent debt after another 18 months firms must propose a repayment plan to help them to repay their outstanding balances more quickly
  • When a customer still cannot afford to repay their balance more quickly, firms should consider reducing, waiving or cancelling any interest or charges.

“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,” said Mr Bailey.

“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.”

Speeding up credit card debt?

  • A customer who borrows £3,000 on a credit card with an APR of 19%, and only makes minimum repayments – starting at £74 per month and reducing over time – would typically take 27 years and seven months to pay it off (assuming there is no further spending on the card). The interest paid would be £4,192
  • If the customer fixed their repayments at £74 per month rather than only making minimum repayments, they would pay it off in five years and two months. The interest paid would be £1,576
  • If they set their monthly repayment at £108 per month, they would pay their balance off in three years. The interest paid would be £879

Source: FCA

The FCA said it expected the measures to lead to savings for customers from lower interest payments as a result of faster repayment.

“By 2030 we expect that the savings to customers would reach a total of between £3bn and £13bn, depending on how firms and customers respond,” it said.

Credit card firms and other interested parties have until July to respond.

Richard Koch, head of policy at the UK Cards Association, said: “We welcome the FCA’s considered proposals and support their view that the overall package is robust, and that the combined effect will address the concerns it has found.

“Identifying and responding to customers who may be facing persistent debt is an important and complex area, which requires careful consideration. The consultation paper sets out a package of measures and over the coming days we will explore these in more detail.

“While the FCA’s original report found that the credit card market works well for most people, we are not complacent and the industry remains committed to helping the minority of cardholders who do not use a credit card in a way which is in their best interest.”

There have been concerns expressed over the current levels of personal debt in the UK. The latest figures from the Bank of England suggested that the annual pace of growth in credit card debt was at its fastest since February 2006.

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