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Credit card firms will have to give more help to customers stuck in severe debt, under new proposals from the City watchdog.
The rules from the Financial Conduct Authority (FCA) will mean providers have to help customers out of debt, rather than continuing to profit from them.
Around 3.3 million people are in "persistent debt" across the UK – defined as paying more in interest and charges than actually repaying the loan over an 18-month period.
The proposals could lead to major changes in the way that providers handle credit card debts. Here’s all you need to know.
What are the proposed rules?
If a customer has been in persistent debt for 18 months credit card providers will be required to prompt them to make larger repayments, and explain that this will reduce the cost of the debt over time.
If the customer remains in persistent debt for a further 18 months – so three years in total – the provider must take additional steps.
This could involve agreeing a repayment plan with the customer to help them repay the debt within a “reasonable period” – which the FCA says is three or four years.
Customers who do not respond to such a request or refuse to pay back the debt more quickly when they are capable of doing so, would then have their card suspended.
If a customer can’t afford any of the options to repay the debt, the provider would have to take further action to help the customer. This could include reducing or waiving interest and charges, which would likely include suspending the card too.
It is understood that it will be up to providers how they implement the proposals, as long as the end outcome is helping the customer to repay within a reasonable time frame.
Will any of the measures affect my credit rating?
This will depend on the exact implementation of the rules by individual providers.
Providers may choose to report to a credit reference agency when a customer is moved to an altered repayment plan or has card access suspended.
The degree to which any measures will affect a credit report will depend on how providers report them and the scoring applied by the credit reference agencies.
James Jones, of credit reference agency Experian, explained that being placed on a repayment plan could be marked on a credit report with a “special instruction flag” detailing the length of the plan.
“While this would be visible to future lenders, the fact that you are taking steps to pay a debt off could play in your favour", he said.
Mr Jones added that having interest or charges waived, or having a card cancelled, shouldn’t affect a credit score.
Can’t I just switch to a 0pc balance transfer card?
Moving credit card debts that are proving difficult to pay down onto a 0pc balance transfer deal elsewhere is often the most efficient way to prevent the debt from spiraling out of control.
Having a card suspended with one provider will not automatically preclude a customer from getting a card elsewhere.
This will depend on passing a credit check and other lending criteria, as usual. However, if a card suspension or another step taken has been reported to a credit reference agency, this will likely make it more difficult to get a new card elsewhere.
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Is anything else changing?
The FCA’s proposed rules are part of a wider package of changes it is suggesting after an in-depth study of the credit market – the final findings of which were released last year.
Other proposed changes include requiring providers to flag customers at risk of financial difficulty earlier on, notifying customers when a promotional offer comes to an end, and clearer standards for price comparison websites.
The City watchdog has also proposed giving customers greater control over credit limit increases, meaning they would have to authorise any rises in the limits.
When will this happen?
Credit card industry trade body the UK Cards Association has agreed three new measures already that will come into force next year.
From April customers will be notified when a promotion is expiring and will have more control over their payment date, while from July customers will be notified when they are close to their credit limits.
The proposed rules on persistent debt are in the consultation stage, meaning there is no set implementation date at this stage.
The exact timings will depend on the consultation outcome, but it could happen as soon as the end of this year.
Are there any concerns about the new rules?
Tom Lyon, of switching service uSwitch, said that the proposals are "good news" for struggling credit card users, but that there is a danger credit card providers will prematurely cut off customers’ access to credit to meet the rules.
"Many people are reliant on their credit cards to make ends meet and for these consumers limiting their credit could throw them into even more difficult situations," he said.
How will the rules be enforced?
The FCA has the power to intervene when a firm does not adhere to its rules, issuing fines or requiring compensation.
- Have a question for our experts? Email moneyexpert@Finance.co.uk
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