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New credit card rules to help break cycle of persistent debt

Paloma Kubiak
Written By:
Paloma Kubiak

Consumers are set to save up to £1.3bn a year in lower interest charges as the financial regulator’s set out new rules to protect those in persistent debt.

Credit card firms will need to contact customers who’ve been in persistent debt – where interest and charges are more than the starting balance – for over 18 months.

The firms will be required to prompt customers to change their repayments and let them know that their card may be suspended if they don’t change their repayment pattern.

Once someone’s been in persistent debt for 36 months, the provider will need to offer a way to repay the balance in a reasonable period. But if customers can’t pay, the firm must show “forbearance”, the Financial Conduct Authority (FCA) said.

This may include reducing, waiving or cancelling any interest, fees or charges.

While the rules come into force on 1 March 2018, firms have until 1 September 2018 to comply.

The move comes following an FCA study of the credit card market. It analysed 34 million credit card accounts over a five-year period, surveying 40,000 users.

It found that customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing. There are around four million accounts in persistent debt and firms have few incentives to help these customers because they are profitable.

Christopher Woolard, executive director of strategy and competition, said: “These new rules will significantly reduce the numbers of customers with problem credit card debt. Credit cards offer customers flexibility to manage their finances and repayments, but with this there is a risk customers can build up and hold debt over a long period of time – without making much headway on the outstanding balance.

“Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly, are given help.”

Credit card firms have also agreed to voluntary measures, which will give customers control over increases to their credit limit.

Under the measures agreed by credit card firms customers can opt-out from receiving automatic credit limit increases.  Customers in persistent debt for 12 months won’t be offered credit limit increases, which should result in around 1.4 million accounts per year not receiving such offers.

Richard Koch, director of cards at UK Finance, said: “Today’s announcement is an important outcome for consumers. Alongside the voluntary measures devised by financial providers, these rules will reduce the cost of borrowing by encouraging individuals to pay back their card balances quicker, where they can afford to do so.

“We will continue to work with the regulator to ensure the credit card market remains competitive, innovative and responsive to the needs of all its customers.”