Fewer people saving money and higher levels of debt across the UK population has seen new proposals put forward by the Financial Conduct Authority (FCA) to tackle debt on credit cards. These proposals are designed to help those struggling with persistent levels of debt; it is currently estimated that 3.3 million people in the UK are in persistent debt.
You are deemed as being in persistent debt if you have paid more in interest and charges than you have repaid from your borrowing over an 18 month period. 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 can not only be 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 that even a small rise in interest rates could bring about repossessions and failures of over-extended business as many households and businesses are just about managing currently.
Recent figures from the Bank of England are likely to have further prompted the FCA to act with regards to credit card debt as they suggest that growth in credit card debt in the UK is at its fastest rate since February 2006. Latest figures from the Office of National Statistics (ONS) shows that consumer spending is running well ahead of income, a position which is unsustainable.
Low interest rates mean that borrowing is attractive and debt feels manageable despite lower incomes. This is perhaps 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.
These new statistics on debt come at the same time as findings suggesting that the UK’s savings ratio stood at 3.3% in the last 3 months of 2016. This is the lowest level since records began 54 years ago, with the previous low standing at 4.3% in early 2008 when Northern Rock collapsed prior to 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. As a result, the habit of saving money has slipped away and that is another worry for the Bank of England and the FCA.
Habitually saving brings about reassurance of 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 need to be made worth it with better rates as currently inflation is twice as high as interest rates.
All these findings are why the FCA has said that credit card firms must do more to help those in persistent debt. They feel that the firms should work with those who are in debt to draw up payment plans and put their customers in greater control of their financial situation.
The proposals the FCA have put forward 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 that three year period.
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 this persistent debt spiral for those who are struggling or are in a precarious financial position.
Credit card firms and other parties with an interest in this area have until July to respond to these proposals before they go any further. To find out more about the FCA’s proposals, visit their website.