Have you had a letter from a credit card, store card or catalogue saying you are in persistent debt? That suggests you increase what you pay each month?
Hundreds of thousands of these letters are going to people who have only been paying the minimum amounts for a long time.
Here is one:
If you’re still paying more in interest, charges and fees than you’re repaying your credit card debt in nine months’ time, we’ll write to you again to remind you how to reduce your debt. We’re sorry but if you don’t increase your payments, we could end up having to suspend your credit card.
Some of the letters are rather vague. You may not think it is clear what will happen to what you owe, or to your credit rating, if you just carry on paying the minimums each month.
So let’s look at why these letters are being sent out and what your options are.
New rules to help people stuck in credit card debt
The Financial Conduct Authority (FCA), who regulates banks and other credit card lenders, has been worried about credit card debt for several years. It found that in 2014:
- about two million people were either in arrears or had defaulted on a credit card;
- another two million people had held a balance above 90% of their credit limit for over a year; and
- a further 1.6 million people were consistently making the minimum repayments to their card.
Only paying the minimum to a credit card prolongs the time to repay a debt by many years, because the minimum drops slowly each month.
The FCA decided it wanted to help people who were paying the minimum for too long. So it introduced new rules in 2018 about persistent credit card debt which it defines as:
someone who has paid more in interest (and any other charges) than they have repaid off the capital over the last 18 months.
It is these rules that have made credit card companies send out warning letters to customers. The same rules apply to catalogues and store cards.
How to check if you are in “persistent debt”
That definition might not be very clear to you. If you have been spending on the card, how can you know how much capital you have repaid?
You don’t have to work this out, your credit card firm does, but many people will want to know.
If you normally pay more than the minimum, you won’t be classified as in persistent debt. It’s fine to only pay the minimum sometimes – it is one of the advantages of credit cards that the payments are flexible.
If you are paying no interest on a 0% card you can never be in persistent debt. And if your card has a low rate of interest, your minimum payment may be too large for you to have this problem.
The easy way to see if you may be in persistent debt is to look at your last month’s statement. Compare the minimum payment with the amount of interest it will charge next month:
- if the minimum payment is £127 and £55 interest will be charged next month, then you will be paying 127-55=£72 off the capital.
Here you are paying off the capital faster than the interest. Even if you always pay the minimum, you won’t be classified as in persistent debt with this credit card.
- if for the same minimum payment of £127 the interest charged was £68, the minimum payment would only pay off 127-68=£59 off the balance.
That is less than what you are paying in interest. If you always pay the minimum on this account you will be in persistent debt.
Sending letters – then taking action
The new rules set out what the lender has to do depending on how long you have been in persistent debt. Here is a brief summary:
At 18 months – a letter
At 18 months, a firm has to write to a customer. The letter has to explain that paying more would make it cheaper and quicker to repay the balance. It should encourage the customer to talk to the firm about whether they can pay more and say where the customer can get free debt advice.
The lenders have to check every month if you have got to the 18-month point. As the rules came into force in September 2018, a lot of people will have received the 18-month letter at that point.
At 27 months – another letter
If a customer is still in persistent credit card debt at 27 months, firms have to write again, saying the same things and warning what will happen at 36 months
It is this 27-month letter that many people are currently getting in May/June 2019.
At 36 months – faster repayment or the card will be cancelled
At 36 months, if the customer has not increased payments and is still in persistent credit card debt, the credit card firm must take action. For people getting the 27-month letter now, this will be in March 2020.
The firm has to offer the customer a way to repay the whole balance within three or four years. This could be by a higher repayment option or by providing a loan to clear the balance. This may mean paying much larger amounts each month.
If the customer says they can’t afford the faster payment option, the firm has to reduce or freeze the interest being charged and the account will be suspended or closed.
When a customer ignores the offer of faster repayment, the firm must suspend or close the account.
So at the 36-month point, there is no option for the customer to carry on paying the minimum and keep their account open.
What about your credit record?
The FCA hasn’t said exactly will happen to your credit record. It is up to the normal credit card reporting rules and each firm what they do.
Nothing will happen to your credit card if you ignore the 18- and 27-month warning letters and just carry on making the minimum payments. They are all you are legally obliged to pay so your credit score won’t be harmed.
At 36 months, if you choose the offered faster payment option to clear the card quickly, I don’t think this will affect your credit score as you will be paying more than the card minimum.
But if the interest is reduced or frozen, or your account is cancelled, this is very likely to be reported and will affect your credit score.
Some firms have tried to reduce the number of letters they send
Some lenders have decided sending all these letters and then making people pay more or close their accounts at 36 months isn’t a great idea.
A few lenders increased the minimum payments for everyone last summer. Others have been calculating a recommended payment amount each month which is higher than the minimum. Credit cards that have gone for these approaches will have fewer or no customers in persistent credit card debt.
What are your options when you get a warning letter?
If you can afford to pay more than the minimum
Paying more every month, or any months you can afford it, is a very good idea. It will really reduce the time it takes to pay off your balance and mean you pay much less interest.
One option if you don’t want to use the card for spending is to look at paying a fixed amount every month. See the minimum payment trap for some examples of how much this can save you.
But be careful you don’t get into more debt problems elsewhere by overpaying this card or catalogue. Don’t get behind with bills or priority debts. And having a higher overdraft can be a lot more expensive than credit card borrowing.
If you can only afford to pay the minimum
You can carry on paying the minimum for a while.
This won’t last for long though so it isn’t a comfortable option. At the 36-month point you won’t be able to afford the faster payment option, your card will be suspended and your credit score will be harmed.
So it would be good to think if you can improve your situation:
- with a good credit score, see if you could get a 0% balance transfer;
- could better budgeting free up some money to pay off credit card and catalogue debt?
- look at the new “ways to save without trying” and see if one would work for you. If it does, you can pay up the small amount saved off the credit card or catalogue at the end of each month.
If even paying the minimum is difficult
Your problem may seem too big to improve by better budgeting. Perhaps you are already struggling to pay the minimums. Or perhaps you now have several of these letters.
Here it is a good idea to get some help sooner rather than later.
StepChange has set up a specialist team to help people who are getting these letters: you can email them or phone them on 0300 303 2517. They can help you look at your situation and your options – the choice is always up to you and it is confidential.