It’s crunch time on credit card persistent debt. We can help.

By Ammer Malik, Senior Business Development Manager

It seems a long time since the Financial Conduct Authority first announced new rules in 2018 to help people escape the trap of expensive long-term credit card debt. Yet only from now is reality really hitting, as the first group of borrowers reach the 36-month trigger point for new actions. Even the FCA is showing concern about whether firms may rush too quickly to cancel people’s cards. Here’s what we’re doing to help.

The good news is that over the last 12 months we’ve been working with partners from across the financial services sector. We’re fully ready to support both people with a persistent card debt and their lenders, helping them get the information and advice they need to resolve the situation.

By March, firms will be intervening more intrusively with customers who have been making only low payments for a long period.

But exactly what will firms do? How many people are affected? Will a huge flood of people suddenly realise they need debt advice? And how can we help people who are affected by long term persistent debt, and also support their lenders in managing their situation sympathetically and positively?

Remind me — what do the FCA rules require?

The credit card persistent debt rules went fully live on 1 September 2018. They require firms to encourage customers to increase their card payments if they fall into the definition of customers with a “persistent debt”.

The FCA defines this as people who have paid more in interest and charges than they have repaid off their capital balance over the preceding 18-month period. There could be as many as 4 million people in this position.

People have already been getting these letters at trigger points if they have been in persistent debt for 18 months, and again if they’re still in persistent debt nine months later.

Beginning from about now, the next stage of the FCA rules kicks in. Customers who have been in persistent debt for 36 months are hearing from their lenders, who will require them to enter into a plan of some sort to repay their balance in full over a period of three to four years — or enter a forbearance arrangement if this isn’t possible.

At this point, if people don’t engage with their lender, the lender may stop people using their cards. This may be the point at which a problem debt situation could crystallise for some people, depending on their wider financial circumstances.

The FCA has recently issued a “Dear CEO” letter to credit card firms, reminding them that cancelling cards should not be the default option, that forbearance must be offered if needed, and that directing people to independent advice is important, especially for people with multiple cards with persistent debt balances.

Will there be a flood of people hitting problem debt when these 36-month rules kick in?

The FCA’s previous estimates suggested that around 2 million people could still be in persistent debt at the 36-month point — and clearly some of them will have multiple cards.

Not everyone with “persistent” debt will necessarily be in “problem” debt. Some people may not even see themselves as being in debt at all. If they’ve been keeping up their minimum payments on their credit cards, in line with contractual requirements, the fact that their lender is going to intervene to change their payments may come as a shock. Still, some people may be able to increase their credit card repayments without too much difficulty.

This won’t be true for everyone, though.

While accurate estimates are not available, it’s possible that there could be hundreds of thousands of people who may struggle to enter into the repayment plans suggested by lenders without suffering knock-on financial difficulties. That’s why it’s so important that we have a smooth and seamless way of making sure that everyone has clear, practical information and advice about what they should do, irrespective of whether they have underlying financial difficulties or are financially resilient.

So, what’s StepChange doing?

Last year we ran a pilot service designed to help people receiving persistent debt letters from their credit card lenders. Over the past year, we’ve been working with lenders to understand more about how they plan to support their customers, and to help refine our service.

It’s fair to say there’s no one-size-fits-all approach. However, a common theme is that lenders need a trusted third party — such as StepChange — to be on hand to offer credible, practical routes to help their customers to engage with them, and to support people if their problems run deeper than simply needing to change their repayments.

To help achieve this, we’ve built a central online hub and a range of tools such as a credit card repayment calculator, all designed to make dealing with persistent debt easier and less daunting for people. We’ve built an easy way for lenders to signpost their customers to practical and trusted information — and to more in-depth budget planning tools or further debt advice if it’s needed.

This represents the next step in an ongoing direction of travel for us, trying to intervene earlier so that we reach people well before they reach problem debt, and hopefully avert a debt crisis before it happens.

Reaching people who need help but are nervous about engaging with their lender will work best if lenders actively link their customers to independent advice. We’ve been testing our approach to make sure it fits with the kind of information that lenders believe their customers need. As well as credit card customers, this approach will also be rolled out to ensure that store card customers and repeat users of overdrafts are all able to access practical guidance, even if they’re people who would never previously have considered contacting any organisation for debt advice.

Where can I see the tools and resources you have available?

Our new persistent debt hub is relevant to wherever people are in the persistent debt journey. The hub provides a wealth of practical information and an interactive repayments calculator that allows visitors to see how much they could save — in terms of money and time — by increasing their monthly repayments. We’re also launching a new online budgeting tool for those with a persistent debt, with a route through to full debt advice, or to financial management tips, depending on the visitor’s situation.

What next?

We remain concerned that the relatively non-prescriptive approach by the FCA means that there may still be a lot of variation among different firms in terms of how they communicate with customers, and the kinds of options they may offer. So we’ll be continuing to work with the industry to encourage a clear, helpful and meaningful offer from lenders to encourage their customers to take action. We’ll also continue to encourage the FCA to make public its findings as it monitors the effect of its new rules.

As we move through 2020, we plan to further improve and refine our services to people who don’t consider themselves to have a debt problem and may need a different kind of support from the traditional debt advice service. We’ll also be looking to harness technological innovation to support our services.

Just as importantly, we’ll make it easier for lenders who work with us to get good, useful management information to help them refine their own approaches, understand their indebted customers’ needs and profiles better, and make sure that, as far as possible, the impacts of the rules on persistent debt result in positive outcomes for their customers.

On a practical level, we’ll be promoting our new advice hub widely. We’d really welcome and appreciate your help in signposting it widely, whether to industry contacts or credit card customers — and please do email me at ammer.malik@stepchange.org if you’d like further information.