Why is the regulator worried about credit cards – and should you be?

 This is a guest post by Sara Williams, a Citizens Advice advisor, who blogs about everything to do with debt and credit ratings at Debt Camel.

When Lynn asked me what was new in the debt world this week, there was only one possible answer: the FCA, which regulates banks and credit card companies, has proposed new measures to help people in “persistent credit card debt”.

What is “persistent debt”?

If you are buying more things your card balance keeps changing, so how can you tell if this is really problem debt?

The FCA thinks you are in persistent debt if over the last 18 months you have paid more in interest and charges than you have paid off the amount that you borrowed. That is a pretty neat definition. If I have paid £600 to my credit card over this time and I have repaid less than £300, it’s going to take a long while to clear my balance!

The FCA’s research shows there are four million credit card accounts in this situation. And on average they repay £2.50 for every £1 repaid.

That’s shocking!

That is seriously expensive debt. You may be thinking it sounds horrific, nearly as bad as payday loans.

Because it’s so expensive, the banks and other credit card companies are making a lot of money from it. They don’t have any incentive to step in and reduce this.

This is what the regulator is for, to step in and make sure the whole industry has to adopt good standards. This isn’t a nanny state that wants to stop people borrowing and it’s not taking away the flexibility of credit cards that so many people find useful. It’s just saying that the lenders have to encourage people to repay their debt faster.

The FCA is suggesting:

• When people have been in persistent debt for 18 months, the lender will have to write to them to encourage them to increase their payments;
• If they don’t take start repaying faster after another 18 months, lenders should propose a repayment plan to help clear debt more quickly;
• If a customer then can’t afford to start repaying the amount borrowed more quickly, the lenders will have to look at options such as reducing or waiving interest.

Would you be one of the four million problem accounts?

Although I like the definition of persistent debt, it would be a lot of work with a calculator for someone to see if they are one of the affected accounts.

Luckily there are a couple of easier ways you can assess you own card history. Have you made the minimum payment only for the last 18 months? Or have you been using over 90% of your credit limit for most of this period?

If either of those applies, then you are probably in the credit card trap where most of your monthly repayment is going on interest, not paying off what you borrowed. If you buy just one large ticket item on a card, a new washing machine or a baby buggy say, and you only make the minimum payments, for many cards it will take you more than 13 years to pay off that debt. This is because as you pay a bit off, your minimum payments goes down.

When you are using your credit card, this normally isn’t clear to you. You bought some stuff last month, got charges some interest and paid the minimum off, but because you added to your borrowing, you don’t really see how little you debt has dropped.

What can you do to get yourself out of this trap?

You don’t want to wait for the FCA’s proposals to get implemented, that won’t improve your situation for years.

The easy way to avoid this long term debt is to aim to fix your credit card repayments so they don’t drop a little bit each month. If your minimum payment is £58, you may not think that paying £60 will make much of a difference… but if you leave that £60 the same for months, it really does speed up your debt repayment and reduce the cost of your borrowing.

Why not give it a go for a year? You can always change this later if you need to.

A huge thank you to Sara for this post, if you are struggling with debt then please head over to Debt Camel for all sorts of help and advice. Sara makes a huge difference to many peoples lives.