A year on from new rules, is credit card ‘persistent debt’ becoming any less persistent?

By Sue Anderson, Head of Media

One year on since firms have had to comply with the Financial Conduct Authority’s new rules on persistent debt in the credit card market, there’s still a shocking information vacuum on what difference — if any — the new rules have made so far.

The credit card persistent debt rules went fully live on 1 September last year. They require firms to write to customers encouraging them to increase their credit card payments if they fall into the definition of customers with “persistent debt”.

The FCA defines this as people who have paid more in interest and charges than they have repaid off their capital balance over the preceding 18-month period, and estimates there are about 4 million people in this position.

From next March, the next stage of the FCA rules kicks in. At this point, customers who have been in persistent debt for 36 months (around 2 million people, according to FCA estimates) will find that their lenders will not allow them to borrow on their cards, and will require them to enter into a plan to repay their balance in full over a period of several years — or enter a forbearance arrangement if this is not possible.

This might sound reasonable, but the problem is that no one really knows whether the encouragement from lenders to people to pay more has made any difference. There’s also no understanding whether the 4 million people estimated by the FCA as being in persistent credit card debt when they introduced the rules has been dented much (or even at all) as a result.

There is no data to show what people have been doing, and little in the way of anecdotal feedback to suggest that many people have been taking positive action to increase their payments.

Does it make a difference?

Worryingly, as far as we know, the FCA doesn’t know the answer to this question any more than the rest of us do. And anecdotal stories suggest that lenders are far from coherent in explaining what is happening to their customers, let alone in ensuring that they know what will start happening next March.

As a debt advice charity, this concerns us greatly. So much so, in fact, that we set up our own dedicated persistent debt pilot service designed to help people who might be receiving the initial letters, and to help them understand their options and the consequences if they don’t increase payments sufficiently to avoid still being categorised as in “persistent debt” at the 36-month point. The letters that people are receiving from lenders about their situation should also be signposting them to sources of free debt help and advice — so it’s disconcerting that the number of people who have been contacting us under the new service is very small indeed.

Only around 6,000 people have accessed any sort of information about credit card persistent debt from us since the pilot began a year ago, and even then most of this has been information, rather than interactive advice, with telephone contact into the pilot service typically getting only a few calls a week.

At best, perhaps this lack of people seeking guidance on the credit card letters means that most people are confident that they are able to extricate themselves from persistent debt without advice or support — but we highly doubt it, given our recent research findings on subprime credit card debt.

At worst, perhaps it means that people have not noticed or not understood the information (or the signposting to advice) that lenders have been sending them — or that they feel it doesn’t have anything to offer them. We certainly think that some of the information lenders have been sending has been very poorly worded. This reflects the fact that there is no standard format required for delivering it, which is unhelpful and confusing and means that people getting communications from multiple firms may find that the style, tone and content varies considerably.

The gap in understanding

Somewhere in the middle, there’s likely to be a large group of people who simply don’t think they can do much about the situation for now, and who are resigned to a “wait and see” approach.

At the moment, we have no idea whether next March will see a trickle, a flood or a tsunami of people seeing their cards being suspended by their lenders, and what the impact will be on them — or, indeed, on the demand for our services at that point.

We find it hard to believe that this is a “non-problem” though. Given other evidence we’re finding in the credit card market, with people feeling bamboozled into using their cards for routine spending even when they didn’t intend to, we’re dubious about whether the period of voluntary encouragement to increase payments is likely to have made much difference — in which case, 36 months feels like a very long time to allow persistent debt to run.

As we’ve said before, we think the FCA ought to be collecting and publishing information about the stock of credit card loans in persistent debt, and the flow of credit card loans entering the definition. We also need an understanding of the extent to which persistent debt simply “churns”, with people refinancing card balances perhaps into ever more subprime options, rather than entering forbearance programmes.

We think regulatory data is an essential tool through which to measure the effectiveness of the new rules and their impact. Without it, how do we know whether the rules are effectively influencing lenders’ upfront behaviour in terms of better credit risk and affordability assessment, and incentivising better product design that reduces the drift towards persistent debt?

We suspect that once people reach the persistent debt, many will remain there until the mandatory 36-month interventions kick in, suggesting that the earlier interventions between 18 and 36 months to encourage higher payments may not be meaningful.

If we’re right, there could be a need sooner rather than later to review the rules, not least to require bigger capital payments from the outset, so that fewer people end up paying so much in fees and interest and repaying so little capital that they end up in persistent debt in the first place.

It’s time for the FCA to collect and regularly share more information on the extent of persistent debt in the card market so that we can all get a better idea of what’s working, what isn’t, and what can be done better.