In January of this year, the government brought in new laws to prevent credit card companies charging customers for using their credit cards to buy online or in store. In 2013 there was also a law passed to prevent companies making a profit on card surcharges.
However, many customers were still facing high fees of between 2 and 20% of their monthly bill.
Increasing levels of consumer debt in the UK have now led to new rules. These are to be implemented to help those with longstanding debt who will struggle to pay off what they owe in full.
The new rules will come into effect in September this year. They are designed to help borrowers who are struggling to clear their debts.
Credit card companies will be required to act when a customer has been in consistent debt for 18 months. The government defines a customer as being in consistent debt when they have paid more in interest, fees and charges than they have repaid.
This means they are making consistently low repayments which will never allow them to pay their debt in full or which could mean a protracted repayment period, probably over many years.
After 18 months of consistent debt, credit card companies will be required to contact customers and explain that they are paying more in interest than they are paying off their debt. They will be asked to change their repayment methods, or their account could be suspended.
The bank must also explain exactly how much additional interest the customer is paying and the benefits of paying off a higher amount each month.
If no change is made, after 36 months the company must offer a reasonable alternative repayment period. This should mean the customer could pay off the debt in full and avoid excessive interest charges.
Once this offer has been made, if the customer is still unable to make payments then the company must offer the client ‘forbearance’. This could mean voiding the debt, transferring the debt to a lower interest loan with set monthly repayments.
In the UK there are currently more than 3 million credit cardholders with 4 million accounts in persistent debt. On average these accounts pay £2.50 in interest and charges for every £1 that they repay of their borrowing.
To explain the seriousness of interest rates, the FCA gave an example of how persistent debt can escalate.
A customer borrows £3000 on a credit card with an APR of 19% and pays the minimum each month, starting at £74 per month and reducing over time. This would take approximately 27 years and 7 months to pay in full if there was no further spending on the card.
The interest paid would be £4,192.
If the customer fixed their repayments at £74 a month and didn’t reduce them as the minimum payment reduced, they would pay off in 5 years and 2 months.
The interest paid would be £1,576.
Finally, if they paid off more than the minimum amount, for example, £108 and fixed this payment, they would pay off the debt in three years.
The total interest paid would be £879.
These rules won’t come into effect until September, but the FCA hope they will reduce consumer stress and resolve debt problems more quickly. The hope is that at least half of those accounts currently in consistent debt will move to faster repayments within 36 months.
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