In this brief guide, we will discuss the new credit card rules and how they may affect you. The new credit card rules were brought about after the FCA studied how 34 million credit account users used their credit cards over a five year period.

The study conducted by the FCA in July 2016 also looked at how credit cards were working for consumers and it was determined that credit cards were indeed working “fairly well” for most of the thirty million (30 million) consumers who had credit cards. This is 60% of the adult population.

The FCA also concluded that borrowing money was never risk-free and that most borrowers were able to spread their repayments over many months, which in truth is the purpose of credit cards. This, of course, means that credit cards are not risk-free. 

Of Course, due to this inherent risk, not everyone would be able to manage their debts in the most effective manner and there will be a subsection of people who will no doubt fall into credit card debt and possibly persistent debt.

How does the FCA define persistent debt?

The FCA defines persistent debt as when someone has paid more in interest and fees over an 18 month period than they have paid on the underlying debt.

The new FCA rules create frameworks where credit firms must help their consumers by proposing new ways of repaying the debt much quicker and over a reasonable period which may be between 3 and 4 years.

This could be by debt consolidation, transferring the debt to a lower interest facility or by waving of some of the interest fees and charges.

What is persistent debt?

Persistent debt, in short, defined as when customers have paid more in interest and charges than they have repaid of their borrowing over an 18-month period. The new credit card rules are aimed at persistent debt and will look to reduce it by saving credit card users £310 million to £1.3 billion per year.

There are over 3.3 million people in the UK who are suffering from long term debt and paying interest on credit card balances. The new credit card rules aim to help these people get rid of debt faster.

The new credit card rules were released by the FCA and they focussed on how companies should deal with credit card borrowers who have persistent or long term debt.

The FCA put measures in place which would allow credit card companies to wave off some of the interest charges and credit card fees placed on borrowers who clearly look like they were incapable of paying.

How do the new credit card rules help you?

The new credit card rules could help you if you have been in credit card debt for a sustained period and don’t see any way out of the credit card debt. The new credit card rules especially apply to you if you only manage to repay the interest being charged on your credit card account. 

This means you are not repaying the actual debt on your account and hence you could be in debt for much longer as you are only servicing the interest element of your credit card.

The new credit card rules were made to target those who were vulnerable to persistent debt and avoid them from getting into credit card debts which they will be unable to pay back in a short period of time. By intervening now the FCA  hopes the new credit card rules will help break the cycle of people who fall into persistent debt.

On initial glance, the framework proposed by the FCA and agreed on by the credit card companies don’t seem to help those with persistent debt on the face of it but the FCA says that the changes below should result in over 1.4 million offers not receiving offers of increased credit limits and hence reduce the potential of these people entering into more debt.

The framework proposed by the FCA and agreed by the credit card companies included:

Allowing customers to opt-out of automatic credit card limit increases

Customers who are in persistent debt for 12 months or more would be unable to get a credit card limit increase.

The new credit card rules which really help you

Aside from the two framework guidelines listed above the FCA also provided the below as things credit card companies must do to help you out of persistent debt.

Under the new credit card rules put together by the FCA your credit card provider must contact you if you have made monthly repayments which simply cover the interest portion of your credit card debt and not the underlying debt for a long period such as 18 months. They should look for reasonable ways to get you to pay the whole debt in full over a 3 to 5 years period and should consider waiving off fees and interest charges to help you achieve this.

At first, your credit card provider may advise you to start paying more each month to ensure you can pay off your credit card debt faster and may warn you that your credit card will be suspended and you will no longer be able to use it if you don’t pay more of your credit card debt.

If you after 3 years  (36 months) you are still in “persistent debt” then your credit card company will offer you ways to repay your credit card debt in a reasonable period (3 to 5 years). This may include cancelling interest charges and fees which have been levied on the credit account.

The credit card company should also make you aware of the potential implications of making low repayments which can include the possibility that your card could be suspended, and the negative impacts it could have on your credit file.

The new credit card rules which were put in place by the FCA came into place last year and firms had until September 2018 to put them into effect and be compliant with them.

How persistent debt gathers momentum

Getting into persistent debt is frankly quite easy. The FCA says that customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their initial borrowing. The FCA also states that there are over 4 million accounts in persistent debt and firms should have more incentive to help their customers out of persistent debt as this is profitable for them.

Can your credit card provider force you to make increased repayments?

The new credit card rules don’t mean that your credit company can force you to increase your monthly credit card repayments but the credit card company can increase your minimum monthly repayment and in the same way force you to increase how much you can repay each month. 

The minimum credit card repayment is an amount which at least repays the interest, fees and charges that have been applied to your account plus 1% of the outstanding balance.

If your credit card company increases the minimum credit card repayment and you find that you are struggling to make this repayment then you should contact your credit card company and let them know or seek appropriate debt advice.

Seeking help for debt

If you are struggling with credit card debts or any other debts then the new credit card rules may help you but in truth they may take a while before you see any effects. You may want to contact a debt help charity or seek help from any fintech firm which focuses on helping people get rid of their credit card debts and other debts.

You may have gotten into debts due to financial emergencies or maybe you just lost control of your money at some point and have never been able to get things back in order.

Some of the well-known debt help charities in the UK include:

Stepchange, the National debt line and you can also get help and advice from your local Citizens Advice Bureau.

If you’re looking to rebuild your credit score then there a few things you can do to ensure your credit score keeps going up, they include:

Use a credit builder credit card

Get a credit builder loan

Get a secured credit card

Register to be on the electoral roll

Avoid missing credit repayments

Avoid making too many credit applications within a short time

Avoid closing credit accounts too soon.

In this brief guide, we discussed the new credit card rules, if you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.