Credit card providers should consider cutting or waiving fees for people in persistent debt spirals, the City regulator has said.
The Financial Conduct Authority (FCA) also said firms should not just suspend a credit card without having an objectively justifiable reason.
The watchdog has set out its expectations by writing to credit card companies telling them to review their approach to borrowers who are stuck in persistent debt – where they have been paying more in interest, fees and charges than the amounts they have shaved off their balance.
The FCA estimates that customers could collectively save up to £1.3 billion a year in lower interest charges.
The regulator’s previous market analysis found that more than three million credit card holders, with a total of four million accounts, were in persistent debt.
These customers pay around £2.50 on average in interest and charges for every £1 repaid.
We estimate these measures could save customers up to £1.3bn a year in lower interest charges – but it’s important that firms get this right pic.twitter.com/NWg48PGrxD
— Financial Conduct Authority (@TheFCA) February 3, 2020
The FCA said firms should help people who have been caught in a cycle of persistent debt for three years by proposing and agreeing plans with customers to resolve the situation.
Credit card providers should make sure their approach is in line with the FCA’s expectations.
The regulator said companies must encourage customers to speak with them to discuss potential repayment arrangements.
If customers cannot afford the options proposed by the firm, they must be treated with forbearance and due consideration, for example, by reducing, waiving or cancelling any interest or charges.
The FCA said there is also a concern that providers may impose a “blanket” suspension of credit cards for everyone in persistent debt, including those willing to engage and come to an agreement.
In these circumstances, firms are not allowed to suspend a credit card without having an objectively justifiable reason.
Jonathan Davidson, executive director of supervision for retail and authorisations at the FCA, said: “Under our rules, firms must help customers to reduce the level of debt they have on their credit card more quickly.
“If a customer cannot afford the firm’s proposals for how to do this, the firm must offer forbearance, potentially including reducing, waiving or cancelling any interest, fees or charges.
“My advice to consumers is don’t bury your head in the sand. If you can’t afford to meet the repayment schedule that the credit card firm is suggesting, don’t be afraid to tell them. If we find firms are not offering their customers the appropriate level of help, we will not hesitate to take action.
“If the firms do this right, we estimate that this could save customers up to £1.3 billion a year in lower interest charges.”
If people are concerned about persistent credit card debt or are dealing with multiple credit cards, free help is available from the Government-backed Money Advice Service.
Rachel Springall, a finance expert at Moneyfacts.co.uk, said the FCA “may well have thrown struggling credit card borrowers a lifeline”.
She said: “There may well be borrowers out there who are keeping up with the minimum repayments but are unable to pay more each month, and these borrowers need support.
“Hopefully this interjection from the FCA will protect vulnerable consumers who need more guidance on ways to reduce their debts.
“However, if card providers are forced to reduce or abandon interest charges on debts, then this could impact the range of credit card deals that they are prepared to offer overall.
“It will be interesting to see what credit card providers will do in the months to come.”
A spokeswoman for trade association UK Finance said: “The FCA’s new persistent debt rules are designed to help customers to reduce the cost of their borrowing by encouraging them to pay back their credit card balance quicker, where they can afford to do so.
“Where customers have been in this position for 36 months, card providers will set out options to help them to repay their outstanding balance more quickly, usually within three to four years.
“If a customer receives a letter from their card provider, it is important that they do not ignore it and instead make sure they contact their card provider as soon as possible to discuss their repayment options.
“If they remain unsure or if they think that what is being asked for is unmanageable, then we would encourage them to speak to their credit card provider or an independent debt charity to talk through the options and agree a way forward that does not adversely affect their financial situation.”