The Financial Conduct Authority (FCA) has warned banks not to unjustly suspend the credit cards of those trapped in persistent debt.
From February, lenders will be able to freeze credit cards and set up repayment plans for indebted borrowers who don’t pay back more than the monthly minimum.
It’s feared that these new rules would cause widespread cancellation of cards, despite regulators saying this is not the objective.
The FCA has written to banks urging them to consider other measures to help customers clear their debt.
Here, we look at what’s happening to credit cards, and the best ways to pay off your credit card balance.
Why would banks cancel credit cards?
Regulators want to help people trapped in what’s called ‘persistent debt’. This means they are paying more in interest, fees and charges than the amount they are paying off their balances.
The FCA estimates there are three million people in this position in the UK. On average, these borrowers are paying £2.50 in interest and charges for every £1 of debt repayment.
Banks are now obliged to send letters to customers who have been in persistent debt for 18 months, warning them about the cycle they’re in.
18 months later – so after three years in total – credit card providers must offer customers a method of repaying their balance over a reasonable period.
This could be by reducing or waiving interest rates or charges. However, your lender has the ability to suspend your card to stop you borrowing any more.
‘Objectively justifiable reason’
Acknowledging concerns that banks will block credit cards, the FCA has stated that ‘firms are not allowed to suspend a credit card without having an objectively justifiable reason’.
It also advises firms to create payment plans that customers can afford. If you’re given a plan that seems unaffordable, let your lender know. The FCA says it will ‘not hesitate to take action’ if it finds lenders are not offering appropriate help.
How to clear your credit card debt
If you are in persistent debt yourself, or if you want to pay off any kind of longstanding credit card debt, it’s best to pay off more than the minimum amount each month.
It’s much more expensive in the long run if you only make the minimum repayments.
Since minimum payments mainly cover interest and fees, only a very small amount actually goes towards clearing your debt. And since minimum payments are charged as a percentage, they’ll shrink as your debt shrinks, meaning it will take you even longer to pay it off.
Avoid this by picking a set amount to repay each month and sticking to it.
Here’s an example of the difference it can make, based on a credit card with interest of 19% APR on a £3,000 debt – assuming no further spending:
|Monthly repayment||Time taken to pay off||Interest paid|
|Minimum repayment starting at £74 and reducing over time||27 years and seven months||£4,192|
|£74 a month||Five years and two months||£1,576|
|£108 a month||Three years||£879|
In this case, if you continue to pay the initial minimum of £74 a month, rather than going along with the minimum as it reduces, you could save over £2,000 in the long run. And you’d be debt-free more than 20 years sooner.
You can use our credit card repayment calculator to see what difference a fixed payment could make to your credit card balance.
You could also apply for an interest-free balance transfer credit card. If accepted, you’d pay no interest on your balance for a set period, although minimum payments are still required. The longest at the moment is 29 months.
For help choosing the best card, read our credit card provider reviews, which combine real customer feedback and expert Which? analysis.
If you’re unable to meet minimum repayments, seriously consider seeking specialist debt help, such as from debt charity StepChange.