Credit Card Firms Begin Demanding Higher Payments
Over the next few weeks, thousands of consumers across the UK will begin receiving letters from their credit card companies, asking them to pay more to their credit card accounts.
The letters, which for many will be their second reminder, are aimed at encouraging borrowers to get out of persistent credit card debt and are a response to a review carried out by the Financial Conduct Authority (FCA) last year.
When carrying out the review, the FCA found 3.3 million customers across the UK were in “persistent debt” and only paying the minimum amounts to their accounts. Most of these payments the FCA found were going towards paying interest and not reducing the amount that was owed.
The FCA found that credit card firms were profiting from the situation and on average those in persistent debt were paying £2.50 in interest for every £1 that was going towards reducing their debts.
In response the FCA directed firms to identify those customers that were in persistent debt and defined those customers as people that had paid more in interest and charges over the previous 18 months than to reducing the amount they owed.
The FCA also instructed firms that where customers had been in persistent debt for more than 12 months, they should no longer provide those customers with automatic increases on their balances.
They also instructed firms that they had to write to their customers after they have been in persistent debt for 18 months and then again after 27 months and urged them to increase the payments to their accounts.
What if higher repayments are not affordable?
Concerns have been raised, however, that many customers will not be able to increase their payments and may even begin to miss payments to other bills to comply with the letters they receive from their credit card providers.
However, if you have received a letter from your credit card company and cannot increase your payments, you should not panic and begin missing payments to your other bills.
You are not in default with your agreement. Your credit card agreement allows you to make minimum payments. The problem is doing so will cost you and is strong indication that you have little financial resilience. You may also experience financial difficulties later should any emergencies arise or you experience any drop in income.
Also, only being able to make minimum payments may have a detrimental effect on your credit score, as will high levels of borrowing in proportion to your credit limit.
Should Credit Card Firms not be doing more?
Firms, however, have been told that where their customers are showing signs of financial hardship and cannot increase their payments, they should consider whether they can do more to help them by cutting interest rates, fees or charges.
Firms will also have to decide by March 2020 whether to suspend the use of some cards, where their customers cannot increase their payments.
Are there any other solutions?
If you cannot afford to increase your payments and have not missed any payments, there may be other options open to you
The first of these is switching to another provider or refinancing by other means.
For example, one option is to see if you can switch your credit card provider to one who may be able to give you a 0% interest rate on balance transfers, or can offer a lower rate of interest than your current provider.
This would mean more, if not all, the amount you are paying would go towards reducing your debt, rather than paying interest and charges.
Alternatively, you may want to see if you can take out a personal loan to repay your credit card. Often personal loan rates of interest may be lower than those offered by credit cards and again would allow you to pay more towards reducing your balance each month.
Get Debt Advice
Another option is to get advice and assistance, with a view to having a holistic look at your finances.
If you cannot pay more than the minimum amount due and refinancing is not an option, you may be on the cusp of struggling financially.
Where people are only paying minimum payments towards their credit cards, this usually means they will be trapped in long term repayment plans with their lenders and will not have any disposable income for the foreseeable future. This means they will struggle to cope with any financial challenges that life may throw them.
To give one example, provided by the Financial Conduct Authority, where someone has a balance of £3,000 owed to a credit card and the APR is 19%, making minimum payments will take 27 years and 7 months to repay the debt.
This is not sustainable and for most will mean at some point they will risk missing payments. Getting advice before that happens can avoid a lot of problems later.
If you have received a letter from your credit card provider and would like a financial health check, contact a Creditfix adviser on 0808 2234 102.