FCA to propose new credit card rules to reduce debt

The FCA, the financial regulator has proposed new rules to help those suffering from credit card debt in the UK, new sources confirmed this week. The changes will be discussed further in July 2017 and are aimed at helping those that have paid more in interest and charged than they have repaid in borrowing over an 18-month period.

It is known as ‘persistent debt’ if they have been experiencing this for 18 months. But now the regulator says that if a customer is in debt this long, the providers must taken action. Until now, credit card providers could continue to keep charging interest on defaulted customers because it was generated large revenues but the FCA has started to put solutions into place. It estimates around 3.3 million people in the UK are in persistent debt, with more than half (1.8 million) remaining so for at least two consecutive periods of 18 months. (Source: BBC News)

What are the proposed changes for credit cards?

As mentioned above, there is a real emphasis to get the customer out of debt quicker. This includes making repayment plans much quicker and trying to get the debts cleared. For instance, providers can offer a plan for the customer to repay in smaller amounts each month to pay off their debts rather than continuing to charge interest.

Very simply, those who do not cooperate with repayment plans (either not responding or paying), will lose their cards. (Source: Sky News). In some cases, we may see some overdue debts cancelled completely or ‘written off.’

Mr Bailey, of the FCA, said:

“Persistent debt can be very expensive indeed, costing customers on average around £2.50 in interest and charges for every £1 repaid – and eventually this can lead to a spiral of debt.Until this proposal, firms have had little reason to intervene because these indebted customers were profitable.”

“We want to change this situation so that firms and customers will deal with outstanding debt more quickly, and avoid persistent debt in the first place (lasting more than 18 months).”

How much can customers save from this new proposal?

As per the examples above, the new proposal is designed to help those in credit card arrears to clear their accounts sooner and avoid the interest accumulating. Comparing the first and third example, it makes much more sense for the customer to repay over 3 years, rather than 27 years, accruing £3,200 more debt in the process.

Bailey from the FCA continued to say:

“By 2030 we expect that the savings to customers would reach a total of between £3bn and £13bn, depending on how firms and customers respond,”

The new change is aimed at giving more power and control to the customer. There is also the idea of giving them greater power over their increase in credit limits. Whilst is it usually very simple to increase, the proposal should make the process of declining them more simple and greater knowledge from the provider of when to increase and by how much.

Will entering a repayment plan affect my credit rating?

If your account is entering an arrangement, how would this affect your credit score and ability to access future finance?

James Jones from Experian told The Telegraph that being placed on a repayment plan could be marked on a credit report with a “special instruction flag” detailing the length of the plan.

“While this would be visible to future lenders, the fact that you are taking steps to pay a debt off could play in your favour”, he said.

However, being late on a repayment will be flagged and visible to future creditors. This could cause your credit rating to fall in the short-term and make future borrowing more restrictive or expensive. This is especially if you want to switch to a zero balance credit card which may be harder if you have had a card cancelled or arrangement to pay.

When will the new rules be enforced?

The UK Cards Association has confirmed that the new measures will come into effect next year, 2018.

From this April, customers will be notified when a promotion is going to expire and will have more control over their payment date. From July, customers will be told if they are approaching their credit limits.

Regarding the rules on persistent debt, these are still in the consultation stages, so there is no set implementation date at this stage. The exact timings will depend on the consultation outcome, but it could happen as soon as the end of this year.