If interest is frozen on your debts, you will be able to pay them off much more quickly.
But what if a creditor refuses to do this? Or has been adding interest and charges for years, even though you are in a DMP or they know you are in financial difficulty?
This article has template letters you can use to ask the creditor to change their mind and stop adding interest and charges. And to ask for the previous interest to be refunded to you.
Why should creditors freeze interest?
The Financial Conduct Authority (FCA) who regulates all lenders in the UK says they should treat a customer in financial difficulty fairly. That may sound like kids in the playground saying “It’s not fair, Miss”, but this is a key principle for the FCA.
Here are some extracts from the FCA’s rules.
A firm must treat customers in default or in arrears difficulties with forbearance and due consideration.
Examples of treating a customer with forbearance would include …
considering suspending, reducing, waiving or cancelling any further interest or charges (for example, when a customer provides evidence of financial difficulties and is unable to meet repayments as they fall due or is only able to make token repayments, where in either case the level of debt would continue to rise if interest and charges continue to be applied).
Firms should consider freezing or reducing interest and charges when a customer is in financial difficulty.
People don’t often have problems with debt collectors adding interest, but if you do, check if the debt collector is a member of the CSA, whose Code of Practice for debt collectors says:
Consider reducing or stopping interest, charges or fees being applied to an account if a customer has demonstrated financial difficulties.
So the regulator and also the banks, credit cards and debt collectors organisations are all saying the same thing – consider freezing interest.
“Consider” may feel a bit vague – perhaps a lender will just tell everyone “We thought about it and won’t freeze interest as it will lose us money” … they aren’t allowed to do that. If they do, they will very probably lose any cases that are taken to the Ombudsman!
Does it matter how you deal with the creditor?
Offering creditors lower payments is called making an arrangement to pay if you contact the creditor yourself. If you do this in writing, the lender is more likely to to freeze interest if you enclose an Income & Expenditure sheet as that proves you are in financial difficulty. If you phone them, many creditors will talk through your income and expenses to be sure you can afford what you are proposing.
Or you can go through a firm such as StepChange that operates Debt Management Plans (DMPs) Here you make one payment a month to the firm who divides it between your creditors. For more details about debt management and who can benefit most from it, read What is a DMP?.
As part of a DMP, creditors are asked to accept a lower payment each month, freeze interest and not add further charges.
But how you deal with your creditors shouldn’t make a difference. The key thing to remember is, if you are in financial difficulty, lenders have to consider freezing interest.
Do check if interest is being frozen in a DMP
If your DMP has only just started, don’t worry if interest is still added. It can take a while for your DMP firm’s letters to be read and acted upon. You may even get chasing letters saying you need to pay in the first couple of months – ignore these!
But after three months it’s worth checking if all your creditors have agreed to freeze interest. Most of them will have, and many people will find all their creditors have frozen interest.
If they haven’t, your DMP firm will probably write to them again, but I suggest you also write to the lender.
If they are still adding interest … ask them to stop!
If you (or your DMP firm) has asked a creditor to freeze interest and sent them your Income & Expenditure Statement, but the creditor is still adding interest, send them a version of the following letter, deleting any bits which are not applicable for you. It’s best to send this by email, which is instant, free and you have a copy of what you sent with a date stamp. If you post it, it’s best to send it recorded delivery – or by email.
If you have mental health issues such as depression or anxiety, you could add a bit about this into the letter. Some people would prefer not to, but it could make a lot of difference as lenders usually have policies in place for different treatment of ‘vulnerable’ clients, see this article on Debt and Mental Health for details of what to write.
If that doesn’t work…
You have asked nicely, now it’s time for a formal complaint to the lender.
If you get a refusal or no answer within 8 weeks, take your complaint to the Financial Ombudsman.
The Ombudsman is a customer-friendly service. You don’t need to be able to quote laws the lender has broken, just explain your situation and why you feel the lender is being unfair by continuing to add interest.
Here is a judgment where the Ombudsman upheld a complaint about not freezing interest. Argos was ordered to refund all interest and charges that had been added since the customer’s DMP had started, and not add any more unless the debtor’s situation improved significantly.
Letter doesn’t quite fit your case?
Not all cases are simple, so just change the template so it describes what happened to you.
And do take cases to the Ombudsman if they have been rejected. Even if the lender has replied saying they are legally allowed to do this, you may still win your complaint at the Ombudsman if they have behaved unfairly.
Here, for example, is a case where a catalogue company had frozen interest on a customer’s account, but then added backdated interest on a Buy Now Pay Later deal. The Ombudsman decided this was unfair and made the lender remove the interest,
Is this likely to work?
Sending these complaints isn’t guaranteed to work but it’s well worth a try! Getting that interest frozen could make a HUGE difference to how quickly to clear the debt.
A DMP is an informal debt solution and you can’t legally make your creditors to freeze interest. But most creditors do freeze interest if you have supplied a reasonable Income & Expenditure Statement. If you are in a DMP, your DMP firm will have sent the creditor this.
In 2018 some banks are paying refunds if they didn’t freeze interest
Some creditors are starting to realise that decisions they made a few years ago weren’t fair.
In 2018 Barclays started a program of refunds to some customers where it now feels it didn’t treat them well when they told Barclays or Barclaycard they couldn’t make normal payments. This includes some people where it carried on adding interest and/or charges.
One reader read the article about Barclays and contacted his bank, Lloyds to ask for a refund:
I had written to them in 2013 during our DMP asking if they would freeze interest. They reduced it but didn’t freeze it for another 12 months. I asked them yesterday to consider refunding the interest for this 12 month period.
I had a call this afternoon to say that at the time they had fulfilled their obligation but on reflection they should have reduced to zero %. They offered me a refund of all interest plus a goodwill gesture of £75 and a very sincere apology which was accepted. I had the money on my account (£706.00) within an hour of that call!
This is very good news.
This article is kept updated.