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Borrowers warned to exercise caution over credit card holidays

Emma Lunn
Written By:
Emma Lunn

Credit card holders face adding £250 to their balance with a six-month holiday, according to wealth management firm Quilter.

The firm is warning that delaying repayment could put people at increased risk of going into problem debt and finding themselves in a position where it is difficult to clear their balance.

The Financial Conduct Authority (FCA) announced in April that lenders should offer a three-month payment freeze on credit cards and loans to anyone struggling financially due to Covid-19.

On 1 July it confirmed a further three-month payment break for those still struggling.

Extra interest

But analysis from Quilter shows that someone with an average credit card debt could incur more than £250 of interest over a six-month holiday, increasing their outstanding balance by about 10%.

Credit card holidays have been taken out by 961,700 borrowers according to the latest data from UK lenders. The Money Charity estimates the average credit card debt in the UK to be £2,655.

At the average interest rate of 18.54%, an individual would see their card debt increase to £2,909 over a six-month period, adding about 10% to their balance.

Across the UK as a whole an estimated £2.6bn of outstanding credit card debt could be going unpaid under Covid-19 credit card holidays, accumulating an additional £247m in interest over six months, according to Quilter’s estimates.

Exercise caution

Quilter is warning credit card borrowers to exercise caution over taking a credit card holiday and suggests only using them where necessary, as it could have a long-term impact on their financial future.

Charlotte Nixon, Quilter’s mortgage expert, said: “The government and the banking sector should be congratulated for implementing an extensive package of holidays for borrowers at short notice, covering loans, credit cards and mortgages.

“However, consumers should be wary about treating them as a no-cost excuse not to clear their balance. In most cases, borrowers will still be accruing interest on their outstanding debts. Our calculations estimate that over a six-month holiday, the average credit card borrower could rack up an extra £240 in debt.

“In the immediate term, this will mean people are worse off since they’ll need to pay more to clear their balance when the holiday ends.”

Impact on future lending

Although payment holidays are not supposed to impact credit scores, extra credit card debt could affect some people’s eligibility for lending going forward.

Lenders use a wide range of factors to assess whether to extend a mortgage to someone, and if you have significant outstanding credit card balances that may count against you.

“Although taking the holiday should not register negatively on your credit score, in the way a normal missed payment of a credit card might, the outstanding balance could still count against you if you can’t clear it,” said Nixon, “The waiver of normal debt repayment rules is being labelled a holiday, but don’t let this fool you. Repayment holidays are not a break from your debt obligations, they are a short-term reprieve. Banks will continue to accrue interest on outstanding balances and could build up £240m of interest if all those currently taking a credit card holiday do so over six months.”