Credit Card Debt Changes
Credit card debt changes
In February 2018, the Financial Conduct Authority (FCA) published changes to the rules of credit card debt. At this time, it was estimated that the changes would save consumers between £310 million and £1.3 billion a year in lower interest charges, however credit card users may now see their accounts suspended within the next month.
The changes were made to improve protection for credit card users experiencing persistent debt and to ensure that those unable to repay their debts quickly were given additional support.
What is persistent debt?
You are considered to be in ‘persistent debt’ when you pay more in interest and charges on your credit card than you have repaid of the amount borrowed. Persistent debt is usually calculated on your activity from the previous 18 months.
What changes were made?
The new rules require credit card firms to take escalating steps to encourage customers making low repayments over an extensive time period to increase their repayments.
After 18 months of being in persistent debt, your credit card firm is now expected to reach out to you and prompt you to change your repayment plan and inform you that if it goes unchanged, your account may ultimately be suspended or closed.
At the 18-month mark, if consumers are to alter their repayment plan successfully, they have the potential to escape persistent debt within the following 18 months. This can be a turning point for those in difficult financial situations.
Once a consumer has been in persistent debt for 36 months, credit card providers are now expected to offer alternative ways to repay their debt within a reasonable time frame i.e. 3-4 years. They may suggest an affordable payment plan or transferring credit card balance to a personal loan with lower interest.
When these changes were put into effect, credit card firms had until September 2018 to inform their consumers that they had 18 months to start to reduce the capital sum they owed. This means that further action is expected to kick in next month for those who have failed to make changes to their repayment patterns.
This is extremely worrying for those who struggle to escape persistent debt due to insecure incomes.
What to do if you are affected by the change
We would encourage those struggling with debt repayment to create a simplified financial statement to give a clear indication of your income and expenditure. This can be helpful to identify where you are able to reduce unessential expenditure and allow a higher payment towards your credit card debts.
To create a financial statement:
- Add up all the money you have coming into the home
- Then list ALL the money that you are paying out on basic living expenses. Remember to include all essential outgoings e.g. childcare, prescription charges etc.
A rough estimate for housekeeping would be:
Single person | £50 - £65 per week |
Couple | £70 - £95 per week |
Each Child | £25 - £40 per week |
Non - Dependent | £25 - £40 per week |
To find out how much you can offer your credit card lender and other creditors:
- Take away your total expenditure from your total income.
- This is your disposable income
- Next, make a list of all your outstanding balances to creditors
The best way to divide your disposable income amongst creditors is by what is known as ‘pro-rata distribution’. This gives all your creditors a fair share of the money available. If your credit card debt is your only debt, then your disposable income may be the amount you can pay towards your credit card.
To work out the pro-rata payment:
- Multiply each individual debt balance by the disposable income then divide by the total amount due to all creditors.
Debt balance X disposable income / total amount due to all creditors = pro-rata payment available to creditor
When creating a financial statement, consider the following questions:
- Are you paying too much for insurance?
- Are you using the cheapest method for paying your bills?
- Are there other ways you can reduce your expenditure or increase your income?
If you have been able to reduce your expenditure you should have more disposable income available to pay your credit card and other creditors. If you are unable to reduce your expenditure and have no way of increasing your payments, then we advise you to seek advice from us at TC Debt Solutions or from a free sector organization such as your local Citizens Advice Bureau.
You might be eligible for The Debt Arrangement Scheme (DAS) (which freezes interest and charges) and therefore may be preferable to something like consolidating debts into a further loan to which interest and charges are added. You may also wish to consider a formal insolvency option if DAS is not suitable. For any help or advice, contact our experts at TC Debt Solutions for free on 0800 046 3328 or email us at advice@tcdebtsolutions.com.
About the author
Ian Brown
Ian is an expert in the Debt Arrangement Scheme and Business Debt Arrangement Scheme, assisting individuals, sole traders and partnerships.
He also advises on personal debt solutions recommending the best option to resolve problem debt issues.