Understanding persistent debt and minimum credit card payments

New rules about persistent debt and Coronavirus

In light of the recent Coronavirus outbreak, the Financial Conduct Authority has announced that it is suspending the obligation for banks to suspend the credit cards of people who are in persistent debt.

This is due to the fact that the Covid-19 is having a considerable effect on people’s finances across the country. Customers who are in persistent debt will now have until 1 October 2020 to respond to communications from their lenders regarding persistent debt, meaning that for the time being, those who are in persistent debt won’t need to worry about their card being cancelled in the immediate future. 

What is persistent debt? 

Persistent debt is a relatively new term. The FCA (Financial Conduct Authority) introduced it in early 2018 to describe a situation when people have been paying more in interest and charges than their credit card’s actual balance for a period of at least 18 months.

How do I know if I’m in persistent debt?

If you’ve been making minimum payments on your credit card for more than 18 months, your credit card provider will write to let you know that you’re in persistent debt. As well as asking you whether you can increase your minimum repayments, they must make you aware of other payment options that are available to you – and also what can happen if you don’t increase the amount you’re paying.

Under FCA guidelines, here’s the timeline that your credit card company will work to so you know what to expect:

After 18 months of making minimum payments – you’ll receive a letter from your card provider, asking you to increase the minimum amount you pay. They will do this because you’ve been paying more in fees, interest and charges than your actual balance. This is to protect you from paying high amounts of interest over a long period of time and to reduce the chances of you falling into long-term debt.

After 27 months – you will receive another letter with a similar message if you’re still in the same position and only making the minimum payment. Your credit card provider may suggest an increased amount or new repayment plan.

After 36 months – your card provider will write to you a third time if you haven’t increased your minimum payments by this date. They will either increase this amount (if they haven’t already done so), offer you a way to repay your balance in a reasonable period or they could suspend your credit card. Given the date that the FCA released guidance, the first letters of this kind will be sent in March 2020.

How do I get out of persistent debt?

If you’ve been keeping track of your money with a budget, take a look through it and see where you can cut back on spending. If you don’t have a budget, we can help you create one.

You’ll find some handy budgeting tips here.

First of all, see whether you can take one of the three options below to deal with your persistent debt:

  • Pay the same amount each month – this will need to be above your minimum payment so it’s worth working out what you can afford.
  • Pay the minimum payment requested by your credit card provider, plus a fixed amount each month – paying a few extra pounds every month can make a huge difference.
  • Make one-off additional payments when you can afford them – you’ll still need to keep paying the minimum payment every month, but this is a good way to help reduce your overall balance.

To find out how much your credit card is costing you, check CardCost’s useful site.

Does being in persistent debt affect my credit score?

If you carry on making minimum payments at the 18- and 27-month points, your credit score won’t be harmed.

At 36 months, as long as you choose to pay more than the minimum amount, your credit score shouldn’t be affected.

However, if your card provider reduces or freezes interest, or cancels your account, this is very likely to be reported and could affect your credit score. 

Man checking his finances

What are my options?

Simply put, the best thing to do is to increase the amount you’re paying each month to your credit card provider.

For example, if you make the minimum repayments on a card with £5,000 balance and an interest rate of 18.9% APR, it could take you 31 years and 10 months to pay off your balance. Not only is this an extremely long time to pay off a credit card of £5,000, you’ll have also paid a huge amount in interest over those 31 years.

If you can increase payments to a fixed amount of £150 per month, you’ll have paid the card off in three years and 10 months – and paid a lot less in interest and charges along the way.

1. Stop spending on your card

More easily said than done, but it’s a natural solution. When you stop using your credit card, your balance will go down quicker and you will get out of persistent debt faster, reducing the amount you pay in interest and charges.

2. Get in touch with your credit card provider

Your creditors might be willing to suspend the interest and charges on your credit card if you’re in persistent debt. It’s up to them how long they’ll be happy to do this for, but if they do, it means all the money you were previously paying in interest and charges can go towards getting your balance down instead.

3. Consider switching credit cards

Switching credit card providers might see you get a better deal somewhere else. If possible, try putting some of your persistent debt onto a 0% credit card with a balance transfer.

It’s a good idea to let your current provider know you’re considering doing this; they might improve the deal they’re giving you if they know you’re thinking about switching.

Credit cards are designed for short-term borrowing. If you feel that you need to borrow money for a long time, a loan may be more helpful. For advice and support about managing your money, talk to our friendly team on 0800 280 2816.

Why do I need to make minimum credit card payments?

When you use your credit card, you need to make a minimum repayment to your card provider every month to avoid extra charges.

Paying off the bill in full each month means you won’t pay interest on what you’ve borrowed. If you don’t pay off any outstanding balance in full then interest will be charged. Your minimum payment is usually a percentage of the balance – so the quicker you repay, the less it costs.

Check out our guides on how to reduce your spending and maximise your income – you might be surprised about how much you can save on your bills and benefit from making more of your money.

Why is my credit card provider asking me to increase my minimum payments?

This has happened because you are deemed to be in persistent debt. Your credit card company isn’t trying to get more money out of you, or force you to pay what you can’t afford so they get their money back quicker. They’re acting according to the FCA guidelines mentioned above – to help you not waste your money on interest and charges and to stop you from falling into long-term debt.

What if I don’t increase my payments?

If you choose not to increase the amount, you’ll still need to carry on making the minimum payments. Your card provider will contact you regularly – see the timeline above – and suggest other options.

But what if I can’t afford higher credit card payments?

Sometimes it can be hard to increase your payments, especially if you’ve got a lot of essential costs going out of your account every month. However, if you’re in persistent debt you’ll really benefit from increasing your monthly repayment, even if it’s only by a small amount.

We’ve also got a downloadable budgeting planner that you can use if you’re unsure where your money’s going every month; it’ll help you identify areas where you can cut down. Are there some changes you could make? Some great tips include:

  • choosing Netflix instead of going to the cinema

  • taking a packed lunch to work

  • getting your energy on a fixed tariff

Changing your repayment date

Perhaps you can’t afford to increase your credit card payment because it’s taken out at the end of the month when you don’t have much of your wages left.

One way around this is to simply change your repayment date to the start of the month (or just after you’ve been paid, whatever part of the month that is) so you don’t leave yourself struggling.

At the same time, you could change all Direct Debits so they come out earlier in the month just after you’ve been paid.

One-off payments

If you can’t afford to increase your regular payment, you could get your balance paid off quicker by making one off payments every now and again.

Perhaps there’s a chance for overtime at work. If you get busier periods where you might be able to work extra hours and come out with a bit more money than usual, you can put some of it towards paying off your credit card balance.

Remember that making one-off payments doesn’t replace making your monthly minimum repayment; you’ll still need to do this regardless of whether you make a one-off payment of £5 or £300.

Will my card be suspended if I don’t start paying more?

This is generally a last resort. If you keep ignoring the letters and don’t increase your minimum payments at all, then there is a chance that your card provider will suspend your credit card.

They will only do this if they feel that you aren’t making any effort to get out of persistent debt (e.g. ignoring their letters and not making any payment increases or one-off payments) and decide that suspending your card is the only way to stop you paying any more in interest and charges.

See what the Money Advice Service advise about dealing with persistent debt.

How do I get urgent help?

If credit card payments are just part of the picture, and you’re feeling under pressure about other debts, give us a call on 0800 280 2816. You can count on us to listen without judging you and to offer solutions that will help you towards a brighter future.

For a clear idea of where you are with your money, talk to us on Live Chat or fill in our debt help form.

Start a new conversation

Why not call us for a chat on 0800 280 2816? Our offices are open from 8am to 8pm Monday to Friday, and 9am to 3pm on Saturdays. Alternatively, you can use our online debt solution tool, PlanFinder, to get a personalised debt solution to suit your circumstances.