The Financial Conduct Authority (FCA) has warned banks not to unfairly suspend the credit cards of those trapped in persistent debt.
Starting in February, lenders will be able to freeze credit cards and set up repayment plans for borrowers with debt who don’t pay more than the monthly minimum.
There is concern that these new rules will lead to widespread card cancellation, although regulators have said that was not the goal.
The FCA has written to the banks urging them to consider other measures to help customers write off their debt.
Here, we take a look at what happens to credit cards and the best ways to pay off your credit card balance.
Why would banks cancel credit cards?
Regulators want to help people trapped in what is called “persistent debt”. This means that they pay more interest, fees and charges than the amount they pay on their balances.
The FCA estimates that there are three million people in this position in the UK. On average, these borrowers pay £ 2.50 in interest and fees for every £ 1 of debt repayment.
Banks are now forced to send letters to customers who have been in debt for 18 months, warning them of the cycle they are in.
18 months later – so after three years in total – credit card providers must offer customers a way to pay off their balance over a reasonable period of time.
This could be by reducing or removing interest rates or fees. However, your lender has the option of putting your card on hold to prevent you from borrowing more.
“Objectively justifiable reason”
Acknowledging fears that banks will block credit cards, the FCA said that “businesses are not allowed to suspend a credit card without having an objectively justifiable reason.”
He also advises businesses to create payment plans that customers can afford. If a plan is offered to you that seems unaffordable, let your lender know. The FCA says it “will not hesitate to take action” if it finds that lenders are not offering appropriate assistance.
How to erase your credit card debt
If you yourself are in persistent debt or want to pay off long-standing credit card debt, it’s best to pay off more than the minimum amount each month.
It’s much more expensive in the long run if you only make the minimum repayments.
Since the minimum payments mostly cover interest and fees, only a very small amount is actually used to pay off your debt. And because minimum payments are charged as a percentage, they will go down as your debt goes down, which means it’ll take you even longer to pay it off.
Avoid this by choosing and sticking to a fixed amount to repay each month.
Here is an example of the difference it can make, based on a credit card with 19% interest APR on £ 3,000 debt, assuming there are no expenses. additional:
|Monthly repayment||Time to pay||Interest paid|
|Minimum refund from £ 74 and decreasing over time||27 years and seven months||£ 4,192|
|£ 74 per month||Five years and two months||£ 1,576|
|£ 108 per month||Three years||£ 879|
In this case, if you continue to pay the initial minimum of £ 74 per month, rather than accepting the minimum as it decreases, you could save over £ 2,000 in the long run. And you would be debt free over 20 years ago.
You can use our credit card refund calculator to see what difference a fixed payment could make to your credit card balance.
You can also apply for an interest-free balance transfer credit card. If accepted, you would not pay any interest on your balance for a set period of time, although minimum payments are still required. The longest currently is 29 months.
To help you choose the best card, read our credit card provider reviews, which combine real customer and expert feedback. To analyse.
If you are unable to make the minimum repayments, seriously consider seeking help from a debt specialist, for example from the charity StepChange.