Derin Clark

Derin Clark

Online Reporter
Published: 03/06/2019

Credit card borrowers considered to be in persistent debt are currently receiving letters to take action to repay their debt or they could be required to enter into repayment plans and may have their cards suspended.

People who are considered to be in persistent debt are those who have reached 27 months of paying more in interest and charges than they have paid off from their balance. Consumers who receive a letter to take action are being urged to act now as, if they continue to be in persistent debt after 36 months, from March 2020 they will be required to enter into a repayment plan with their card provider and may have their card suspended. The repayment plan could mean borrowers are forced to make higher payments each month, which debt charity StepChange warns could result in people reaching a cliff edge moment when they struggle to make repayments.

This move towards enforcing credit card repayments comes as part of new credit card rules introduced by the Financial Conduct Authority (FCA) in February last year. At the time of the rules being introduced, the FCA estimated that four million accounts are in persistent debt and providers have few incentives to help these customers because they are profitable. The regulator introduced the new rules to try and combat the amount of persistent debt in the UK, however StepChange believes not many in persistent debt have taken action to reduce the amount they owe.  

Phil Andrew, StepChange Debt Charity CEO, said:

“The regulator’s approach to how credit card providers should address longstanding credit card debt initially relies on getting them to encourage people to increase their payments voluntarily. We don’t know how many people have increased their credit card payments as a result of the communications they’ve received, but our sense is that not many have. This begs the question about whether that’s because they haven’t realised the importance of doing so, haven’t noticed their firm’s communications, or simply can’t afford to pay more. We think the regulator should try to find out.

“Our own persistent debt pilot service hasn’t dealt with enough people to give a reliable understanding of the landscape, but has certainly given us worrying cause for concern about the risk of people hitting the buffers hard at 36 months, when actions become compulsory. At this point, there may be significant numbers of people with ‘hidden’ problem debt who are coping on a minimum payment basis but could tip over into difficulty once higher payments are required, and may need help and forbearance at that point.”

Credit cards and overdrafts can be incredibly useful forms of borrowing if used wisely, but if not, they can quickly become lead weights – and many borrowers unwittingly get themselves into unmanageable debt as a result.

Borrowers have been urged to keep an eye on the date their debt repayments are due, after it was revealed missed payments typically rise by 9% in January.

According to ClearScore, defaults increase by 5% in the first month of the year as well, as the festive spending spree takes its toll.

The warning comes after new analysis showed debt levels in the UK are higher than before the financial crash.

The TUC has warned that families are being pushed ever further into the red after household debt rose sharply over 2018.

Indeed, unsecured debt – which includes credit card borrowing and loans – rose to £15,385 per household in the third quarter of 2018, up £886 on a year earlier. In total, the debt mountain increased to a record high of £428bn in the quarter, well above the £286bn peak seen in 2008 ahead of the financial crisis.

A payment missed on a debt will be marked on a borrower's credit report, likely having a negative impact on their credit score. Even worse, missing multiple payments could be declared as a 'default', which will stay on a credit report for six years, even once the debt is paid off.

With lenders viewing such borrowers as a greater risk, they may then struggle to get accepted when applying for credit cards, mortgages and loans.

"Any of us may miss payments from time to time, but this can have a huge impact on your credit score," said Justin Basini, CEO and co-founder of ClearScore. "Think about setting up direct debits so that you can always automatically pay on time, and don't incur late payment fees. If you miss several payments and have defaulted, you should avoid borrowing further until your debt is more manageable.

"If you find yourself unable to afford payments, you can get free advice from charities like StepChange, Debt Advice Foundation or National Debtline, who can put together a personalised repayment plan for you."

What next?


Check your credit score

Before you apply for a credit card, mortgage or loan, you'll want to do what you can to maximise your chances of getting accepted, and in the case of credit cards and loans to get the best possible rate. An important part of this process is finding out what your credit score is.

Credit unicorns

Credit unicorns (a term first coined in New Zealand) are those with an enviably high credit score – the 'one percenters', if you will – who are therefore highly likely to be accepted for any loan type they may want to apply for. If you have a highly positive credit rating and you're thinking of how to pay for the upcoming festive season, you are lucky to have all options open to you.

For instance, if you're thinking of getting something back from your festive spending, you may already have a cashback credit card at the ready. However, recent news of some welcome changes in the cashback card market means that your current card may not hold the best value for money anymore. As a credit unicorn, you're obviously a diligent borrower who always pays off any debt in full as soon as possible, so it shouldn't be a problem to switch over to a more competitive card deal whenever one appears – just don't wait too long, otherwise the offer might disappear or you might not receive the card in time for Christmas.

Credit donkeys

While real donkeys may have gotten a bad reputation, when it comes to your credit rating you can't go lower than being a credit donkey. If you have one of the lowest possible credit scores, you'll likely have a long road ahead of you before you have improved your rating enough to qualify for a Best Buy credit card, loan or mortgage.

The first step away from being a donkey would be to stop applying for credit, if you're still trying to do so, and take stock of your debts. If you're feeling pressure to spend a lot of money on Christmas presents, now might be the time to pull your loved ones aside and talk to them earnestly about your money situation. If this sounds too scary for you, consider contacting a debt charity first.

With this extra seasonal stress hopefully dealt with, it's time to tackle your debt. While you'll want to avoid lowering your credit rating further by applying for a new card or loan and getting rejected, with some careful consideration you should be able to transfer your debt onto a 0% balance transfer credit card or consolidate it all in a personal loan. The former would give you time to pay off credit card debt without interest adding to it for some time, while the latter can give you a schedule of manageable, set monthly repayments to give you back some control.

Once you're out of debt, did you know there are special credit repair cards that can improve your rating over time? There are even bank accounts without overdraft facilities that can help you keep on track and improve your rating. Of course, all of these helpful methods are only as effective as your ability to keep up with repayments and not be tempted to overspend.

The rest of us

The majority of us will fall somewhere between the donkey and the unicorn. Credit horses, perhaps. Without checking your score on a regular basis, however, you won't know exactly where you fall, which means you won't be able to predict how likely you are to get accepted for that all-important mortgage or credit card.

With different providers using different metrics for credit ratings, it's a good idea to get reports from different Experian is even completely free – and challenge any mistakes you find. Armed with this knowledge, you can apply for the deal you want with more confidence.

Find out how to improve your credit score

­

This week marks Talk Money Week, where providers and debt charities have come together to help people open up about their financial situation. It seems this is highly needed, as well, as research from Arrow Global has found only 19% of Brits seek out debt advice, despite it being free.

To manage your money effectively, it can be beneficial to heed the words of experts – such as can be found on this site. And yet, when it comes to asking for advice, 46% of consumers said they don't need it, while 28% look only to their friends and family.

Not talking about your finances, especially if you're struggling with debt, could be a recipe for disaster. Indeed, many people in debt feel out of control of their finances, which is exactly why debt charities exist.

Sticking your head in the sand when it comes to debt can have dire consequences for your credit rating, among other things. An expert would be able to tell you this and help you minimise any detrimental impact on your credit score as much as possible. They would also be able to help combat any misinformation, with the survey finding that 27% of consumers didn't know a missed debt repayment can have a negative impact on your credit rating for up to six years.

Even just getting your credit report can help you understand your financial situation better, yet while 56% have checked their credit rating using one of the free credit report services available, 70% said they only did so out of curiosity and didn't take further action as a result.

Our guide on improving your credit score could be a big help.

Credit cards are the most common source of debt, reported by 45% of survey respondents. Missing a payment on card debt could not only decrease your credit rating, but if you have a 0% interest deal, you might lose this introductory offer instantly, which could result in a large interest rate that you would then be unprepared to pay off.

Speaking of interest, 31% of respondents said they are unaware of how much interest they are paying on their credit card, while almost half (47%) of those with student loans are equally unaware and 41% of those with an overdraft don't know what they're adding to their debt every month.

"Our research reveals there is a worrying lack of awareness among consumers when it comes to the interest rates they are paying on their debts … we're concerned this is potentially storing up debt problems for the future," commented Lee Rochford, Group CEO of Arrow Global. "Financial awareness is critically important for all consumers and will help ensure consumers manage their finances in a responsible and affordable way."

What next?

If you're dealing with card debt, you may want to get a 0% balance transfer card to give you some time to pay it off without interest adding to it. For other or larger types of debt, you may want to consider a personal loan for consolidation purposes – but if you're not sure what to do, there should be a debt charity such as Citizens Advice or StepChange nearby that can offer some helpful and free personalised advice.

­

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