Credit card borrowers with longstanding debts given final warning

Millions of borrowers with longstanding credit card debts will receive a final warning this month to increase their monthly payments or face a compulsory repayment plan.

New rules introduced by the Financial Conduct Authority (FCA) in September last year means credit card borrowers identified as being in persistent debt have already received one letter, but will be sent a second reminder in the next few weeks.

By March 2020, if borrowers haven't started voluntarily paying more than the minimum, providers will be able to freeze the card and set a repayment plan to clear the debt once and for all.

Which? explains the new rules and what action you could take to tackle a longstanding debt on a credit card.

New rules on persistent debt

The Financial Conduct Authority decided to set new rules for credit card firms last year, after it found more than three million people in the UK struggle with persistent credit card debt.

The FCA found these borrowers are paying an average of £2.50 in interest and charges for every £1 of debt they repay.

Since 1 September 2018, credit card companies must send letters to borrowers identified as being in persistent debt. You may in persistent debt if you've paid more interest and charges than what you've repaid of your borrowing over an 18-month period.

The first warning letter is triggered at 18 months and another after 27 months.

After 36 months (three years) of being in persistent debt, the credit card firm must offer customers a way to repay their balance in a reasonable period.

Such a plan may mean your repayment amounts rise. Realistically, your account may be suspended to avoid you spending anymore.

Firms can also cut, waive or cancel interest, fees and charges if you are struggling to repay.

Under the new rules, the FCA estimates that two million customers will move to faster repayments before they hit 36 months and around 1.4 million will do so at 36 months.

Overall, the FCA estimated that customers could save between £310m and £1.3bn per year in reduced interest charges.

• Find out more:credit card interest explained

'Warnings aren't working'

Debt charity StepChange has said that the warning letters are varied, so it was not always clear what action borrowers would face in March.

It also noted that few people had actually increased their repayments to repay their bill sooner.

The charity warns that there may be a large number of people who have not previously considered themselves to be in problem debt or sought advice but could need help particularly those with multiple credit cards.

Phil Andrew, chief executive of StepChange said: 'This begs the question about whether that's because they haven't realised the importance of doing so, haven't noticed their firm's communications, or simply can't afford to pay more.

'At this point, there may be significant numbers of people with hidden problem debt who are coping on a minimum payment basis, but could tip over into difficulty once higher payments are required.'

• Find out more:44 tips for paying off your debts

How to clear your credit card debt

If you've got longstanding credit card debts, you should aim to pay off more than the minimum amount each month.

If you only make the minimum repayments, it will take you longer and cost you much more to repay your debt.

The minimum payment mainly covers the interest or fees accrued over the past month, and just a small amount goes towards paying down your debt.

Plus, as minimum repayment are charged as a percentage, it will shrink as your debt shrinks - meaning you'll repay even more slowly.

Instead, you should pick a set amount to repay each month and stick to it.

In the example below, fixing your repayments at £74 a month, rather than just paying the minimum, can cut the time it takes to pay off your card from 27 years to just five.

You can see how much changing the monthly repayment on your credit card bill can impact the time it takes to clear your balance the total cost using the credit card calculator below.