Credit Card Interest Could Be Wiped Off

Credit Card Interest Could Be Wiped Off.

The Financial Conduct Authority (FCA) has today proposed new rules to help consumers with long term credit card debt problems.

They have used the term ‘persistent’ debt and defined that as follows:

Over an 18^th month period you have paid more in interest and charges than capital repaid on your borrowing.

The FCA also suggests that credit card companies only make money when consumers have persistent debt, so companies rarely intervene to help them.  They plan to rectify this with the following:

Persistent Debt for 18mths

When a customer has been in persistent debt for eighteen months, firms will be required to prompt them to make faster repayments if they can afford to do so.

Persistent Debt for 2 X Consecutive 18mths

Firms must take steps, such as proposing a repayment plan, to help them to repay their outstanding balances more quickly. Customers who do not respond, or who confirm that they can afford to repay faster but decline to do so, would have their ability to use the card suspended.

Further Action - Cancel Interest?

Where a consumer cannot afford any of the faster repayment options proposed to repay their balance more quickly, firms must take further action to assist clients to repay debt in a reasonable period.

E.g. Reduce, waive or cancel interest or charges and suspend use of the card.

Comment

The FCA estimates 3.3m people have persistent debt (18 months) of those 1.8m have had persistent debt for two consecutive 18 month periods.

The FCA also estimates that the average repayment made on any £1 borrowed on card is £2.50.  That’s a 150% return on investment for the credit care company, no wonder they are keen to lend and do not do much to encourage paying debt down.

We would hope the FCA will make credit card companies more responsible for credit card limits offered and even introduce “affordability” tests together with “stress affordability” e.g. lose your job, separate from partner etc to ensure that you credit limit and your ability to repay have been assessed properly.  Credit card companies should also be banned from automatically increasing your credit limit just because you have repaid the debt or you are a good client.  Any increases in credit facilities should be structured, monitored and controlled.