People struggling with credit card debt could save as much as £13bn in fees, thanks to new rules proposed by the financial watchdog today.
The Financial Conduct Authority has found that the 3.3 million with persistent credit card debt are currently paying £2.50 in interest and fees for every £1 they borrow – and because they reap huge profits for companies, lenders have little incentive to help them get out of debt.
Credit card companies will be forced to help customers who are in debt by prompting them to make faster repayments and cancelling interest and charges if they are still unable to repay.
Persistent credit card debt
For most people, credit cards can offer a flexible and useful way of borrowing money. The explosion of super-long interest-free deals means that you can borrow for as long as three-and-a-half years without paying any fees.
However, millions of people are trapped in credit card debt they cannot get out of. According to the financial watchdog, 2.2 million have been in debt at least three years, just getting by with their debt by making the minimum payments.
According to the Bank of England, families now owe more than £66bn in on credit cards.
How your credit card company will help you
The Financial Conduct Authority has now devised plans to force lenders to do more to help these profitable customers fight their way out of debt.
If you’ve been in debt for 18 months…
Companies will be forced to notify you that increasing your repayments would help you save money in fees. They would also warn you that your card could be suspended and that this would be reported to credit reference agencies.
If you’ve been in debt for three years…
Your credit card company will work with you to come up with a repayment plan, lasting three to four years. If you ignore the firm, it will suspend your credit card. If you can’t afford to make repayments, the companies must scrap interest and charges to help you repay your debt quicker.
The financial watchdog believes that this could save between £3bn and £13bn by 2030, if it leads to a shift in the way that people deal with their debt with companies treating them more fairly.
Ending unwanted credit limit increases
The watchdog also intends to tackle the issue unwanted credit limit increases, where credit card holders see the amount they can borrow jacked up without their consent, seeing it as a risk for people who are building up lots of credit card debt.
Indeed, people that received a credit limit increase ended up with an average of £458 of extra debt, according to the Financial Conduct Authority’s analysis of 2014 spending data.
The FCA has now agreed with credit card companies that people who look like they may be struggling with their credit card debt – those who’ve made minimum repayments for eight months – will not be offered a limit increase unless they request one. Those who’ve been paying the minimum fro 13 or 14 months won’t get one at all.
Of course, not all people who get a credit limit increase are struggling with their debt. But new rules will also be introduced to give them more control. According to the FCA, new credit card customers will be ‘given the choice of how credit limit increases are applied to their account,’ either selecting not to receive them automatically unless they opt in, or ‘to have a credit limit increase applied on their account automatically unless they decline it.’
If you already have a credit card, you’ll be offered an easier way to turn down a credit limit increase, and choose to opt in to any future offers.