A reader asked if he should offer a £1 a month token payment to his debts, wondering if his creditors would ever accept it.
The simple answer is that you should make token payments offers:
TO non priority debts
IF you CAN’T get a coronavirus payment break
WHEN it is all you can afford
AND you expect your situation will improve.
In 2020 millions of people have reduced household incomes because of coronavirus and can’t afford the normal monthly payments.
And the FCA, who is their regulator, says creditors can’t push you to pay more than you can afford.
What is a token payment?
Normally if you can’t make the usual monthly debt payments, you should work out what you can afford to pay and divide that amount between your debts pro rata. This means that you are paying most towards the largest debt.
But if you have very little money for your non priority debts, offering a token payment of £1 a month to credit cards, catalogues and loans is better.
It has the big advantage of being simple.
There is no point in messing around with calculations that would pay £2.35 to one debt and 68p to another. By making the same £1 payment to both debts it’s easy for you. Creditors can see what you are doing and you are showing that you aren’t ignoring any debts.
The “token amount” could be more if you can afford it. With £12 to divide between two debts, you could offer them both £5 say.
You can’t make token payments to priority debts
Token payments only work with consumer debts such as loans, credit cards and catalogues.
Priority debts such as rent, mortgage, council tax, electricity and gas bills, and car finance have to be treated differently. There is a list of priority debts here, and some ideas about where to go to get help with the different types of priority debt.
If you have priority debts, a typical plan is to make arrangements to pay them as quickly as possible and pay your other debts such as loans and credit cards a £1 a month token payment until the priority debts are clear. Then you can start paying off the remaining non-priority debts much faster.
“Will a creditor really accept just £1?”
Yes! The regulator suggests that lenders should accept:
token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock, from a customer who demonstrates that meeting the customer’s existing debts would mean not being able to meet the customer’s priority debts or other essential living expenses (such as in relation to a mortgage, rent, council tax, food bills and utility bills).
And recently they have emphasised:
We don’t want to see customers pressurised into unaffordable and unsustainable plans.
So if £1 a month is all you can afford, that is what your lender or debt collector should accept.
“Do creditors want proof?”
A lender or a debt collector will often want to go through your income and expenditure with you.
You make this faster and less stressful if you have done this yourself in advance by using National Debtline’s My Budget. This helps by:
- suggesting types of expenses you may forget about;
- converting everything into monthly amounts;
- sorting out your debts into priority debts and non priority debts;
- working out how much to offer each debt, so the priority debts will be paid in full and the others may only get token payments;
- you can download it to show lenders and debt collectors.
You can also show a creditor proof you are getting benefits or your P45 to show you have lost your job or bank statements. But many creditors don’t ask for evidence.
“My creditor says I can’t afford £1!”
Sometimes this happens!
If you have big problems with your priority debts – and in 2020 many people are very worried about their mortgage or rent or car finance – then you may not even be able to afford £1.
Some lenders will then refuse the token payment you have offered and agree to freeze interest. This isn’t anything to worry about.
“How long can I make token payments for?”
Token payments aren’t going to clear your debts!
If you make token payments for a few years, your debt problem isn’t going to go away or get smaller. You will still get some letters and phone calls.
Many creditors will want to talk to you again after three or six months, to see if your situation has changed,
Think of this as a temporary plan. It can be your best option for many Covid-19 situations where you hope things will get better in 2021:
- you have lost your job;
- your partner is on reduced wages when furloughed;
- you self employment business has been badly affected.
Another common situation is where you have a priority debt that has to be repaid first.
For example, you may reach an agreement with your council to clear your council tax arrears by paying an extra £80 a month for ten months. That doesn’t leave you with enough to make the minimum payments on your credit cards, so you offer a token payment to your two credit cards. When your council tax arrears are cleared, you can then stop making the token payments and divide the extra £80 between your credit cards.
But if you know nothing much is going to change for a long time, then it’s good to look at other debt options, such as bankruptcy or a debt relief order.
“Will creditors freeze interest?”
This is the key question. If your creditors add interest or extra charges, you will be getting deeper into debt each month.
The answer is that creditors don’t legally have to freeze interest, but most creditors will!
Sometimes a creditor won’t accept a token payment straight away. They may say it’s not enough, you need to pay them at least £15 a month before they will agree to freeze interest. Ignore this! If all you can afford is £1, then that is all you should pay.
If a creditor hasn’t frozen interest after a few months, put in a complaint to them.
“Will this harm my credit record?”
Yes. If you can’t make the normal payments to a debt, your credit record will be harmed. Debts will show that you have missed a payment, made a payment arrangement or have defaulted.
(The only exception here is the coronavirus payment breaks. These don’t affect your credit score, although they may make it harder to get credit in the future.)
There isn’t a good way around this problem. Borrowing more money gets you into bigger problems the next month.
“Will my debt be sold to a debt collector?”
After a while – six months or a year, many creditors will decide your problems aren’t temporary and will sell your account to a debt collector.
This is often a good thing! If you are making monthly payments and communicating with your creditors, this just carries on with your new creditor. It’s often easier to reach an agreement with a debt collector than the original creditor.
There is no point in struggling really hard to pay more than you can afford to try to avoid your debt being sold. It’s likely that the debt would still have been sold if you were paying £20 a month, it isn’t only the £1 token payments debts that are sold.
“Will I have to go to court?”
This is theoretically possible but this is very unlikely to be soon if your Income & Expenditure statement shows you can’t afford to pay more.
If you talk to a creditor they will very rarely decide to go for a CCJ quickly. If you stop paying and don’t communicate, things get more difficult more quickly.
The only common exception here is if the debt relates to your business and the creditor knows you have a house with equity.
As time goes on, a creditor may be more likely to think about going to court if you are still making low payments and appear to have a good income or a house with equity. This is another reason why long token payment plans are not a good idea, but don’t let this possibility stop you from making token payments initially if they are your best, temporary option.
“Should I end it as soon as my situation improves?”
Because a token payment plan will never clear your debts, you should try to end it as soon as possible – don’t get comfortable with making those £1 payments, it can’t last!
If your income goes up and you have priority debts, you should concentrate on clearing those first before you stop the token payments to other debts. So clear those rent arrears and council tax arrears, even if you have a payment arrangement in place it is better to pay more and get rid of them.
And after that it is good to save up a bit of an emergency fund.
But then look to increase the payments to your debts that are only getting £1.
When you have only made token payments for a few months and a debt hasn’t defaulted or sold to a debt collector, you may be able to go back making the normal payments and interest will again be added.
If you can’t afford that much, or the debt is defaulted or sold, it’s a case of increasing the payments you can make and the interest should still be frozen.
Talk to a debt adviser if you aren’t sure
If you have priority debts – rent/mortgage problems, council tax arrears, difficulty paying utility bills etc – then those are your big problems. It may sound scary to offer a credit card just £1 a month but this is almost certainly going to be much easier than you think.
If you don’t have priority debts, then token payments can often be your best option if your problems are just temporary.
Talking to a debt adviser can help you see what your options are and which of your debts it might be good to offer a token payment to.
See Where to get good debt advice for who to talk to.