“What should I do when my 3 month credit card payment break ends?”

Ms D asked about her options now the three credit card payment break has ended:

I’ve come to the end of my 3 month payment freeze and as the card lender has kept adding on interest I have gone over my credit limit, so the first payment due was nearly £400.

I contacted them as I couldn’t afford that amount -my partner is self-employed and not receiving any income due to coronavirus. They agreed to accept £50 per month for three months, but they will mark my credit file as I’ve taken an arrangement to pay.

This will obviously affect my credit score for 6 years but is there anything else I can do? 

I’m going to look at a lot of options and talk about how to choose between them.

The quotes here are from the Financial Conduct Authority (FCA), who regulates credit card and sorts of other lenders.

Get back to normal payments if you can

The FCA says:

For those who are now in a position to restart payments, it will be in their best interests to do so. But for those who still need it… there is help and further support.

A few months ago many people will have applied for payment deferrals because everything felt very uncertain and they were worried how their finances would be affected. That was sensible!

Now a lot of people will have realised they have not been badly affected and things are, for them, getting back to normal.  In this case there are good reasons to go back to making the normal payments:

• when you have a payment break interest is still being added (there is an exception here – for payday loans you can have a one month break and no interest is added). Over three months that can be a lot – if you have another payment break it will be even more.
• even though your headline credit score is not affected, lenders may be able to see from other sources that you had a payment break, see  Covid-19 – credit score protection, but will it be harder to get credit? for details.

But what was your “normal” before the pandemic?

If you were finding it difficult to pay all your bills and debts then and your debts were going up in many months, this may be even harder now that you have a missed a few months payments and you need to catch up. This could be a good point for you to take some debt advice about your options, see below.

Take a second three month payment break?

The FCA says:

Where, after an initial payment deferral, and at any time before their first payment is due, a customer indicates they are still experiencing temporary payment difficulties as a result of coronavirus, a firm should offer a full or partial payment deferral to reduce payments for a period of 3 months to a level the customer indicates they can afford.

So as Ms D’s partner’s income is still affected, she can ask for a second three month payment deferral, or to make reduced payments.

This will work in the same way as the first break: even more interest accrues, but her credit score would not be affected.

This could be a good option for Ms D if she is confident that her partner’s income will be back to normal in three months so she will then be able to afford the higher repayments because of even more interest accruing.

Or get interest frozen?

The FCA says:

If you cannot afford to start making repayments, then you must let your lender know. More support is available and firms will consider what is in your best interests. 

Credit card lenders have to offer what the FCA calls “forbearance” to people who are in financial difficulty. This can including accepting lower payments and freezing interest.

These payment arrangements have always been possible, they are not new for the pandemic. They will affect your credit score.

So Ms D has two main choices about what to ask the credit card lender for:

1. if you get a payment deferral, interest will be added but your credit score will be protected. Although it may still be harder for you to obtain credit in future.
2. if you need more help through forbearance, interest should stop but it will be recorded as payment arrangement and this will affect your credit score.

Ask for interest that has been added to be removed

The FCA says:

Where the customer, at the end of an initial payment deferral period, was not given a further full or partial payment deferral of any length under this guidance and was entitled to forbearance under CONC 6 or 7, any interest that would not have accrued but for the initial payment deferral should be waived as soon as reasonably practicable at the end of the initial payment deferral period.

That sounds complicated… It means that at the end of a payment break, if you can’t make the normal monthly payments you can ask for an interest freeze, a payment arrangement AND for the interest that has been added during the payment break to be removed.

When Ms D originally took the payment break, she may not have realised she could ask for interest to be stopped. Or she may have wanted to protect her credit record. Or because you were – like millions of other people – feeling very panicky about everything back in April and you felt you needed this extra help.

But now the interest added is a lot and Ms D  can’t make the normal payments – so the FCA says she can effectively wind back the clock and ask for that interest to be deleted.

Doing this does mean her credit record will be affected. But if she has can’t make the new larger monthly payments without borrowing more (big mistake) or getting behind with bills (another big mistake) then that is probably her best option.

Delay the decision until later?

Of course, if Ms D isn’t sure and hopes her partner will be able to see his self-employed income return sometime in the next three months, then she can decide to take the second payment break.

If it turns out to have been the wrong choice in October, at that point she can ask for interest to be frozen and for a payment arrangement. And for the six months extra interest to be waived.

So she won’t be in a worse position if she goes for the second payment break and things don’t go well,

Be clear about what you are being offered

I’m not sure exactly what her credit card has offered Ms D. They say it will affect her credit record, so that sounds like forbearance and an interest freeze.

But I hope the credit card made it clear that this payment arrangement doesn’t have to just be for three months, it can carry on for as long as it is needed.

And did the credit card company think about waiving the interest they have already added on to her account? Make sure you ask your credit card company for this if you need it.

What about other debts?

So far I have been talking about credit card debt because that was Ms D’s problem

You can also get payment breaks for other types of debt, from mortgages and car finance to catalogues and loans.  For all of these, you can now ask for a second three month payments break if your household finances are still affected by Coronavirus.

You can also ask for forbearance for other worts of debt and for interest to be waived, but you are very unlikely to get interest frozen on “secured loans” such as mortgages and car finance.

If you have several debts you need to think about what you want to happen to all of them, not try to firefight each debt individually. Rather than try to negotiate a payment arrangement with a lot of different people, it may be simpler to look at a debt management plan for all your debts.

You may already know that you have too much debt and your household income may take a very long while to recover. Here it may be good to look at your insolvency options. It’s not easy to make the decision about this –  you don’t want to rush in, but waiting six months or a year will just postpone the time you eventually get a clean start.

Where to get help with this

Often there aren’t simple answers here. It can feel as though you are being asked to predict the future. And your situation may be very different to Ms D’s, or different in a small way you think might be important.

If you aren’t sure what to do, it’s good to talk to a debt adviser, they can help you explore what the alternatives are. This is especially important if you also have problems paying your rent and other bills such as council tax and utilities.

You don’t have to be desperate to get debt advice. The earlier you ask for help, the more options you are likely to have.

Don’t google to find a debt adviser! You can end up talking a firm that is most interested in selling your details to someone else and won’t give you good, independent advice.

Here is my list of good debt advisers.

Who you should choose depends on where you live and what sort of problems you have – there are specialist advisers if you are self-employed, if you need help with benefits etc.

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