New regulations were brought in by the Financial Conduct Authority (FCA) in 2018 to provide more protection for credit card holders in persistent debt or at risk of financial difficulties.<\/p>
The rules mean that your credit card issuer must get in touch with you if you\u2019ve been in persistent debt for a while, or your card might even be suspended. If your card provider contacts you, this doesn\u2019t mean you\u2019ve done anything wrong, but your current repayments are costing you a lot in interest over a long period.<\/p>
Due to the way credit card interest charges and repayments work, it’s easy to let debt drag on and on. Although you can pay off as much as you like each month, you’re only obliged<\/em> to make a small monthly repayment \u2013 typically 2-3% \u2013 while interest rates are commonly around 20% annually.<\/p> This means that if you borrowed \u00a32,000 on a card charging a rate of 19.9% and only made the minimum repayment each month, it could take you a whopping 24 years to pay off the debt and cost you around \u00a34,850. Because the minimum repayment is percentage-based, as your outstanding balance slowly gets smaller, so does your monthly repayment, and the debt drags on.<\/p> The term “persistent debt” refers to consistently paying more towards interest and fees than towards the original amount borrowed. According to the FCA, if this has been the case for at least 18 months, you’re in “persistent debt” and should be contacted by your credit card provider.<\/p> Persistent debt is often caused by customers only making the minimum monthly payment on their credit card<\/a> over a long period.<\/p> Once you’re considered in persistent debt, your credit card provider is legally required to contact you and explain the situation. They’re also required to do the following:<\/p> Your credit card company might decide to increase the minimum monthly repayment, but it\u2019s not necessarily under any obligation to increase your repayments or force you to get out of persistent debt, so it\u2019s ultimately still your responsibility to fix it.<\/p> If you\u2019re still in persistent debt 9 months later (or after 27 months of being in persistent debt), your credit card company will contact you a second time and encourage you to fix your debt situation.<\/p> After another 9 months (or after 36 months of being in persistent debt), your card provider will once again get in touch. At this point, it may offer you a repayment plan to pay off your debt within 3 to 4 years. That means you\u2019ll effectively have a fixed-term personal loan from the card issuer. It should only suspend your card if it has a good reason for doing so. <\/p> However, if you can\u2019t afford the new monthly repayments (which will likely be higher), your card provider might choose to reduce or write off the interest that\u2019s been added to your balance. In this situation, your card will most likely be suspended, and you won\u2019t be able to use it.<\/p> If you can’t afford to commit to a schedule of increased repayments, then aim to make one-off additional payments whenever you have spare cash.<\/p> If you can’t afford to make any larger repayments on your credit card, you should first talk to your credit card provider to discuss your options. You could also contact MoneyHelper<\/a> for free and impartial financial advice.<\/p>What happens when you enter into persistent debt?<\/h3>
I’ve received a letter, but how can I get out of persistent debt?<\/h3>
What if I can’t afford to increase my repayments?<\/h3>