Phil MeekinView Profile
The Financial Conduct Authority (FCA) has made new proposals to tackle credit card debt, as fewer people are saving money, and higher levels of debt are being recorded across the UK. These proposals are designed to help those struggling with persistent levels of debt; which is currently estimated to affect 3.3 million people in the UK.
What is persistent debt?
‘Persistent debt’ is classified as when you have paid more in interest and charges than you have repaid from your borrowing over 18 months. It can be a struggle to get out of this kind of debt spiral as credit is being used for essential spending such as household bills and grocery shopping.
Persistent debt isn’t just expensive for the customer, who is charged £2.50 for every £1 repaid on average, but it is worrying for banks, lenders and the finance industry as a whole. Many fear even a small rise in interest could bring repossessions and failures of over-extended business, as many households and businesses find the current circumstances challenging.
Recent figures from the Bank of England are likely to have further prompted the FCA to act; they suggest that growth in credit card debt in the UK is at its fastest rate since February 2006. Figures from the Office of National Statistics (ONS) show that consumer spending is accelerating ahead of income; an unsustainable position.
Low-interest rates mean borrowing is attractive, and debt feels manageable despite lower incomes, which is a potential reason why, by the end of 2016, the average British household owed £12,887 not including mortgages or student loans. However, this is still an extremely high level of unsecured debt made up of credit cards, loans, overdrafts and car finance.
The previously mentioned statistics on debt come at the same time as findings suggesting that the UK’s savings ratio stood at 3.3% in the last three months of 2016; the lowest level since records began 54 years ago. Before this, the previous low stood at 4.3% in early 2008, with the collapse of Northern Rock before the global financial crisis.
The savings level is down for many reasons; possibly including the recession, stagnant wages and low-interest rates meaning you get less back for your savings. Consequently, the habit of saving money has slipped away, which is another worry for the Bank of England and the FCA.
Habitually saving brings stability to your finances, and a sense of control over your life to be able to afford the things you want and deal with unexpected situations. However, many people have commented that saving needs to be made worth it with better rates as currently, inflation is twice as high as interest rates.
The FCA’s proposals
All these findings are why the FCA has said credit card firms must do more to help those in persistent debt, including credit card debt. They feel the firms should work with those in debt to draw up payment plans and put their customers in greater control of their financial situation.
The proposals also include:
- Firms prompting customers to make faster repayments if they can afford it when a customer has been in persistent debt for 18 months.
- Firms proposing a repayment plan to help customers pay off outstanding balances more quickly when a customer has been in persistent debt for another 18 months.
- Firms should consider reducing, waiving or cancelling interest or charges if customers still cannot afford to repay their balances after those three years.
The FCA expects these proposals, if approved, to lead to savings for customers as they will be paying back less interest on top of the original loan. Faster repayment is advisable for consumers and is now being encouraged to lenders to help break the persistent debt spiral for those struggling, or in a precarious financial position.
Credit card firms and other parties with interests in this area have until July to respond to these proposals before they go any further. To find out more about the proposals, visit the FCA’s website.
With an estimated 3.3 million people in the UK suffering from ‘persistent debt’ due to excessive borrowing and high-interest rates, the FCA has proposed new legislation to help those in ‘persistent debt’ repay their liabilities and regain control of their financial situation. The proposals could see customers repaying more when they can afford to, and quicker if the debt has lasted longer than 18-months, and even reducing or cancelling interest or charges if they still can’t afford to repay after three years. If these proposals are approved, they could help customers build their savings as they’ll pay back less interest on the original loan.
New rules on the credit card market came into force on March 1st, 2018, and firms had until September 1st to comply.