Derin Clark

Derin Clark

Online Reporter
Published: 03/06/2019

Credit card borrowers considered to be in persistent debt are currently receiving letters to take action to repay their debt or they could be required to enter into repayment plans and may have their cards suspended.

People who are considered to be in persistent debt are those who have reached 27 months of paying more in interest and charges than they have paid off from their balance. Consumers who receive a letter to take action are being urged to act now as, if they continue to be in persistent debt after 36 months, from March 2020 they will be required to enter into a repayment plan with their card provider and may have their card suspended. The repayment plan could mean borrowers are forced to make higher payments each month, which debt charity StepChange warns could result in people reaching a cliff edge moment when they struggle to make repayments.

This move towards enforcing credit card repayments comes as part of new credit card rules introduced by the Financial Conduct Authority (FCA) in February last year. At the time of the rules being introduced, the FCA estimated that four million accounts are in persistent debt and providers have few incentives to help these customers because they are profitable. The regulator introduced the new rules to try and combat the amount of persistent debt in the UK, however StepChange believes not many in persistent debt have taken action to reduce the amount they owe.  

Phil Andrew, StepChange Debt Charity CEO, said:

“The regulator’s approach to how credit card providers should address longstanding credit card debt initially relies on getting them to encourage people to increase their payments voluntarily. We don’t know how many people have increased their credit card payments as a result of the communications they’ve received, but our sense is that not many have. This begs the question about whether that’s because they haven’t realised the importance of doing so, haven’t noticed their firm’s communications, or simply can’t afford to pay more. We think the regulator should try to find out.

“Our own persistent debt pilot service hasn’t dealt with enough people to give a reliable understanding of the landscape, but has certainly given us worrying cause for concern about the risk of people hitting the buffers hard at 36 months, when actions become compulsory. At this point, there may be significant numbers of people with ‘hidden’ problem debt who are coping on a minimum payment basis but could tip over into difficulty once higher payments are required, and may need help and forbearance at that point.”

Credit cards and overdrafts can be incredibly useful forms of borrowing if used wisely, but if not, they can quickly become lead weights – and many borrowers unwittingly get themselves into unmanageable debt as a result.

Borrowers have been urged to keep an eye on the date their debt repayments are due, after it was revealed missed payments typically rise by 9% in January.

According to ClearScore, defaults increase by 5% in the first month of the year as well, as the festive spending spree takes its toll.

The warning comes after new analysis showed debt levels in the UK are higher than before the financial crash.

The TUC has warned that families are being pushed ever further into the red after household debt rose sharply over 2018.

Indeed, unsecured debt – which includes credit card borrowing and loans – rose to £15,385 per household in the third quarter of 2018, up £886 on a year earlier. In total, the debt mountain increased to a record high of £428bn in the quarter, well above the £286bn peak seen in 2008 ahead of the financial crisis.

A payment missed on a debt will be marked on a borrower's credit report, likely having a negative impact on their credit score. Even worse, missing multiple payments could be declared as a 'default', which will stay on a credit report for six years, even once the debt is paid off.

With lenders viewing such borrowers as a greater risk, they may then struggle to get accepted when applying for credit cards, mortgages and loans.

"Any of us may miss payments from time to time, but this can have a huge impact on your credit score," said Justin Basini, CEO and co-founder of ClearScore. "Think about setting up direct debits so that you can always automatically pay on time, and don't incur late payment fees. If you miss several payments and have defaulted, you should avoid borrowing further until your debt is more manageable.

"If you find yourself unable to afford payments, you can get free advice from charities like StepChange, Debt Advice Foundation or National Debtline, who can put together a personalised repayment plan for you."

What next?


Check your credit score

It can be difficult to save at the best of times, but there are some generations that find it even tougher – so much so that concerns have been raised over the financial resilience of the late-millennial generation (those aged 25-34), with research from LV= highlighting a lack of savings and rising debt.

The figures show that 55% of this age group fall short of having the recommended 90 days' worth of savings to be financially resilient, well above the national average of 37%, with 34% admitting that they'd be able to survive for just one month or less if they lost their income.

These figures are even more pronounced among renters in this age group, with 65% admitting that they don't have the recommended savings, and 45% only able to cope for a month without an income. Some 44% aren't confident in their ability to handle a personal financial crisis, either, again higher than the UK average (33%).

Furthermore, 43% say they can't save at all, with student debt being the biggest obstacle (40%), followed by credit card bills (32%). Half (51%) have some form of unsecured debt, and one in five (20%) owe more than £5,000 on things like personal loans, credit cards and overdrafts. Indeed, double the national average are in their authorised overdraft – 21% versus 11% – which could be adding further pressure to an already stretched budget.

Despite these difficulties, just 7% of renting 25-34 year-olds have some form of income protection insurance to fall back on should they lose their income, which means many could be seriously struggling should the worst happen.

"It's worrying that so many 25-34 year olds have no idea how they would cope in a personal financial crisis, but those who rent are suffering even more," said Justin Harper at LV=. "It's clear that people in 'Generation Debt' are at risk of finding themselves struggling to make ends meet if they lost their income.

"It's vital this generation isn't overlooked, and industry and Government works together to ensure more people are able to increase their resilience to financial shocks both in the short and long term."

One way the industry is tackling this is by reforming overdraft rules, which will hopefully mean that those falling unexpectedly into their overdraft won't find it quite so difficult to get back out again. It's also thought that lending rules could soon be tightened to discourage excessive borrowing, with the growth of unsecured debt now rising at its fastest level in years.

But what can you do on a personal level to boost your financial resilience? Well, aside from getting income protection insurance, one of the easiest things to do is to start saving. Building up a pot that's equal to three months' worth of outgoings may seem challenging, but it can be done – and you've got to start somewhere!

Start by opening an easy access account that you can gradually drip-feed money into – every time you resist a lunchtime shopping spree, for example, or forgo the weekly takeaway for a home-cooked meal, put the money you would have spent straight into your savings account. You'll soon notice the balance edge up.

Or, if you really want to get into the savings habit, what about a regular savings account? This could be a great way to boost your savings while helping you get into a routine, and pretty soon you won't even notice the money leave your bank account. These deals tend to pay far better rates than many other accounts on the market, too, but just make sure you're happy with the restrictions – some penalise you for missing monthly payments, for example, and others don't allow you to access your money, so always read the small print.

What next?

Check out the best savings accounts to boost your financial resilience

Struggling with debt? Read our tips on how to overcome it, and don't be afraid to seek independent advice

There's nothing worse than being stuck in a spiral of debt, yet unfortunately, credit card companies don't always make it easy to escape, with research from Citizens Advice finding that nearly one in five of those struggling with debt has had their credit limit raised without requesting it. This could make it even harder for someone to get out of the cycle, which is why it's a practice the charity wants to see banned.

Spiralling debt

The Bank of England has already issued a warning to lenders about how they grant credit to consumers, with a report earlier in the year finding that the level of household debt has risen to the highest seen since before the financial crisis. Yet this doesn't appear to have changed providers' stance to credit, with Citizens Advice saying that poor affordability checks are making individual financial situations worse.

Figures show that consumer borrowing has risen to over £200 billion, with £67 billion of that being on credit cards, so there are concerns that many are entering into unmanageable debt territory. This is particularly the case given that those struggling with long-term credit card debt are more likely to have their limit raised, with 18% having it raised in the last year, compared with just 12% of all credit card holders.

Perhaps as a result of that, the charity's report found that those with credit card debts were more likely to get into long-term debt than those with personal loans, and were also less able to pay down their debt – 60% of those struggling with credit card debts were able to reduce it over two years, paying off an average of £449 in the process, compared with 72% of those struggling with personal loans, who repaid £620 over the same period.

Not only that, but Citizens Advice said that it helped nearly 66,000 people with over 140,000 credit card debt problems in the last 12 months, so there's clearly a need for more to be done to help those in problem debt – and ideally, help ensure they don't fall into it in the first place.

Calling for change

The charity is therefore calling for measures to be put in place to help prevent people from falling into long-term credit card debt, including a ban on firms raising credit limits without obtaining consent from the individual, and clear guidance stressing that lenders must check borrowers' ability to repay the balance before raising the limit.

It also wants lenders to intervene to help those with problem debt sooner – the FCA, the UK's financial regulator, has already set out plans to require lenders to help customers who have been spending more on interest charges than repaying the balance for the previous three years, yet the charity wants this to happen "at the very latest after two years".

"Irresponsible offers of further credit are pushing people into long term debt cycles," said Citizens Advice chief executive Gillian Guy. "Citizens Advice helps thousands of people each year with credit card problems - including those struggling with large debts on several different cards that will take them years to pay off.

"It's clear that irresponsible behaviour by some lenders is making people's debt situation worse - such as offering more credit when they already have thousands of pounds of unpaid debt.

"The regulator must ensure that lenders are taking into account people's whole financial and personal situation before agreeing further credit. Banning firms from raising existing customers' credit limits without seeking their express permission first would also help people take more control over their finances.

"Lenders must act responsibly and direct people struggling with debt towards free and independent advice and support - rather than more credit."

What next?

If you're struggling with unmanageable debt, don't go it alone. Start by devising a plan of action on how to tackle it and contact your lender to see if there's anything they can do to help, and don't be afraid to speak to an organisation such as Citizens Advice for additional support.

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