28 Feb Putting the new credit card rules into plain English
On Tuesday, the FCA (the UK’s financial regulator) announced some changes to the way credit card companies have to behave. We know, you’ve probably already read it… But just in case you’re not as fascinated by consumer credit regulation as us, we thought we’d demystify what these changes mean.
On Tuesday, the FCA announced some new rules for credit card providers. By their estimates, consumers could save between £310 million and £1.3 billion per year in interest charges. Assuming 60% of people in the UK have a credit card, that works out to an average saving per person of between around £10-£40 per year.
In reality, it won’t look like that. Only those in “persistent debt” will really benefit from these new rules. They have been especially designed to help “customers who are making low repayments over a long period”. As a result of the new rules:
- Credit card providers must prompt customers to make more than just the minimum repayments after 18 months, and eventually suspend their card if they don’t change their repayment pattern.
- For those that have been in persistent debt for more than 36 months, credit card companies must offer customers a way to repay their balance in a reasonable amount of time.
- If a customer can’t make the repayments, credit card companies must “show forbearance”, which “may include reducing, waiving or cancelling any interest, fees or charges”.
Any company that doesn’t comply with the new rules could face the wrath of the FCA, which involves more than a stern telling off. Firms could face fines, or even suspension, for non-compliance.
What is persistent debt?
Much of the new rules focus on those in ‘persistent debt’. Under the FCA’s definition, credit card customers are in persistent debt if they have paid more in interest and fees than repayments toward the original amount they borrowed over the past 18 months.
Typically, the minimum monthly repayment a credit card company will require is 1% of the original borrowed amount (plus interest), or £5 – whichever is higher. When interest payments and fees take up more than half of what you pay, clearing your debt can taken an extremely long time (or may even be impossible).
Persistent debt is dangerous, because it makes it almost impossible to pay off credit card debt. When interest payments and fees take up more than half of your repayments, clearing your debt can take an extremely long time. For example, if you borrowed £250 on a credit card at 40%, making just the minimum repayments would take you 10 years to pay it off.
Credit card companies have also agreed to “voluntary measures” (thanks in no small part to the FCA). These include:
- Giving customers a way to opt-out from receiving automatic credit limit increases.
- Preventing credit limit increases from being given to customers that have been in persistent debt for more than 12 months.
According to the FCA, this should result in around 1.4 million accounts per year not receiving credit limit increases. While this sounds like an anti-consumer measure, Citizens Advice have found automatic credit limit increases push people further into debt, and they especially impact people who already consider their debt to be a heavy burden.
Why are these changes being made?
The FCA’s primary responsibility is to protect consumers in the UK. The changes are the result of a 5-year study that analysed the accounts of 34 million credit card holders in the UK and around 40,000 consumer surveys.
Christopher Woolard, Director of Strategy and Competition said:
“These new rules will significantly reduce the numbers of customers with problem credit card debt. Credit cards offer customers flexibility to manage their finances and repayments, but with this there is a risk customers can build up and hold debt over a long period of time – without making much headway on the outstanding balance.
‘Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly, are given help.”
According to the FCA, “customers in persistent debt pay around £2.50 in interest and charges for every £1 they repay of their borrowing.” Approximately 4 million accounts are in persistent debt in the UK. The FCA notes that companies lending to those people have hardly any incentive to change their behaviour, because it’s so profitable for them.
When can we expect to them to come into effect?
The new rules are coming into effect on the 1st of March, but credit card companies have until the 1st of September to comply.