Persistent debt: when credit cards get out of control
More than half of the UK population has a credit card and, for many, it’s a useful resource, offering cashback, greater protection on purchases and, of course, the opportunity to spread the cost of a large item.
The problem comes when people are using credit cards all the time, something known in the industry as 'persistent debt'.
The Financial Conduct Authority (FCA) is rightly concerned. In June 2017, £67billion was owed on credit cards and this kind of debt is growing.
No wonder the attention has fallen on the 4.5million people who have problem debt and especially the 1.6million making the minimum payment month after month after month.
The FCA wanted the debt advice sector’s thoughts on just what should be done and today that consultation time is over. CAP is keen to see just what happens next!
The FCA’s proposition is that, after 18 months of paying just the interest and not tackling the debt, a credit card customer should be:
- Sent a letter encouraging them to pay off more, warning of the dangers if they continue to just pay the interest and charges – it will also point towards debt help
- Sent a further reminder if they’re still in persistent debt after another nine months
- Sent a letter, after 36 months in total, asking the customer to choose an alternative payment mechanism to pay more quickly, with a signpost to debt help – if they don't engage, the card will be suspended or cancelled, and if they can’t afford to pay more, they’ll be offered support (such as stopping interest and charges) to help them pay off the balance
As you’d hope, Christians Against Poverty has responded in full to this consultation because, in all such cases, these decisions at the top can have a huge positive or negative effect on those who are rarely heard.
As part of our remit to speak up for those who don’t often have a voice, we’ve explained how more than six in ten of our debt clients were using credit cards to pay a household bill or other debt repayment.
We warmly welcome the FCA’s ideas for intervention when a credit card debt seems to be persistent, but we’re also raising concerns that for many, it will come too late.
Instead, we’d like to see the first letter going out at six months. We believe that 18 months is a long time to endure unmanageable debt and, in our experience, the longer a problem continues, the less likely people are to open their post.
We find CAP clients who wait two years before seeking help are too afraid to open letters (75%) and too scared to answer the phone (64%).
We’d like a softer approach at an earlier point, highlighting the dangers of unsustainable credit but in a way that is likely to trigger a good decision-making process.
As ever, we’re grateful for the work of the FCA, which has already brought about huge changes in a changing industry – and it’s an honour to be asked our opinions.