First quarter of 2020 – before COVID-19 measures were being proposed to firms, by the FCA, on how they must treat credit product customers financially affected by the pandemic – the Financial Conduct Authority had already written to credit card firms to review their approach to those stuck in a ‘persistent debt’ cycle. 

It’s not uncommon to hear that many of the borrowers that have received an email or letter, (known as ‘persistent debt’ notice) are surprised at its arrival. Many receivers question, what is persistent debt? And ask why they are being urged to repay more than the minimum monthly payment off their credit card.

It’s been assumed by many of us that repaying the minimum, is the bare minimum that we must do. It keeps our head just above water and off any lenders radar, as we are not waiving on our responsibility to repay.

I’m repaying the minimum, so my lender should leave me alone – right?

Not anymore. Repaying the minimum for a while, if needs must, is ok. And 2020 would be a prime and good example of a year where many households have cut back to the minimum repayments, and have needed to take advantage of 3-month payment freezes. 

But irrespective and not linked to the pandemic, the FCA had set out new rules for firms to follow, which encourages their customers to repay their credit card debt quicker, or at least pay-off more than the minimum payment, so the balance reduces each month, and they are not accruing years and years of interest.  

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

It’s easy to see how you’ll end up paying as much in interest as you’ve spent on your card – unless more than the minimum payment is repaid each month. 

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So, what is persistent debt and why is my lender implying I’m in it? 

With the fairly new FCA rules, a red flag will now pop-up with your lender. If over an 18-month consecutive period you’ve paid more in interest, fees and charges than you have repaid on your credit card balance – you’ll be classed as being in ‘persistent debt’.  

Your lender, dutifully, will contact you in writing with a persistent debt notice, by letter or email, and encourage you to raise the amount you’re repaying monthly, so your balance starts to go down faster.

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 £1.3bn a year in lower interest charges.’

Don’t panic about a ‘persistent debt’ notice 

When you first receive contact from your lender after 18-months, do not worry, there are three steps your lender will follow, which are three notifications in writing over an 18-month period, which explains what you need to do.

  • First contact is after 18-months, the lender will write to its persistent debt customers and urge them to pay more money per month than just the minimum payment or, ask them to discuss their situation if they can’t afford to up their repayments.
  • If customers take no action a follow-up comes in writing at 27-months, reminding customers of the first contact and urging them to pay more money per month than just the minimum payment, or, ask them to discuss their situation if they can’t afford to up their repayments
  • And after 3 years of consecutive persistent debt and no action, the lender will insist on customer action.  Either agree to a repayment plan to pay off their balance in a sensible timeframe, usually 3-4 years, or to get into contact and explain their situation and look to work out a solution that works for both parties. 

Persistent Debt: in quick summary 

If you don’t want to go through the 18-month process of being contacted by your lender and want to start reducing interest and becoming debt free, the simplest thing to do is increase the amount you’re paying off on your credit card each month – but only as long as you can afford it.  

Your credit card company are obliged to help you, the persistent debt notice is them saying, either help yourself by paying more, or talk to us about your unique circumstances, and we’ll see if we can help you pay back your credit card balance sooner, so you’ll be debt free faster and pay less in interest over less years.

If consumers are concerned about persistent credit card debt and/or have multiple credit cards they are dealing with, they can find information about free debt advice from National Debt Helpline, StepChange, or Citizens Advice 

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NOTE: The Financial Conduct Authority (FCA) has introduced rules that mean providers must grant a minimum three-month repayment freeze to anyone struggling to pay their credit card debts due to the coronavirus pandemic.