Changes are so easy on greedy firms

NEW rules for credit card firms introduced to help people struggling with persistent debt could be too little too late.

The changes, brought in by the Financial Conduct Authority, don’t go far enough for those already stuck in a downward spiral.

The City watchdog should have got tougher and forced firms to act quicker.

Their rules are pretty weak, considering the FCA has spent years consulting over this very serious issue.

While they are a step in the right direction, they will do nothing to help those who have been filling the coffers of credit card firms with extortionate interest upon interest for years on end.

And they won’t stop future borrowers from ending up in the same dire straits.

Credit card firms now have to take a series of steps to help customers who are making low repayments over a long period.

But, they don’t kick in until after someone has been in persistent debt over 18 months – ie simply paying the minimum repayment set by the card provider each month.

Even then the action is pretty limp as all card firms have to do under the new rules is simply contact a customer to let them know the benefits of increasing repayments.

Then at 27 months that process is repeated. Not until someone has struggled for a full three years does any proper help come into force.

Card issuers have got to offer customers options to repay their balance more quickly.

And those who cannot afford to pay higher amounts should be offered further help such as reduced interest, fees or charges.

There are also voluntary measures which give people control over increases to their credit limit.

But it takes action from the customers for this to kick in – they have to opt-out from receiving automatic credit limit increases. It should be the other way around. There should be no credit limit increases unless a customer requests one.

And even then it should never be granted if there are signs of financial pressure on a borrower’s card account – it’s just pouring petrol on the flames. Peter Tutton, head of policy at StepChange Debt Charity, said: “We welcome the FCA’s recognition that solutions are needed for the 3.3 million people trapped in persistent credit card debt.

“But we remain concerned that the FCA has not yet taken adequate steps for the flow of new borrowers who may be heading towards persistent debt.

“There is a need to break the cycle of firms allowing customers to build up expensive long-term debt.

“The new rules do not address the continuing risk that firms will allow new profitable customers to rack up expensive debt for a long period.”

One simple change would have made all the difference – especially for borrowers moving forward – and this is to change the minimum repayment. The current 3% of a balance or £5 is simply not enough to make any sort of dent in debt balances and leaves millions of people simply servicing the interest each month. It is misleading to those borrowing as they don’t understand that it is not enough to tackle the outstanding balance.

If minimum repayments were set at 5% or £10 it would make a big difference and enable people to clear balances quicker and cheaper.

For example, on a £6,000 balance it would reduce the time it takes to clear it from 23 years and one month to nine years and 11 months.

And that would chop the interest paid from £5,543 to almost half that amount, at £2,415.

Surely, that would have been a much more sensible start – rather than leaving people struggling for years on end.

Andrew Hagger from personal finance website Moneycomms.co.uk, said: “The earlier a card company takes action the less it costs a credit card borrower.

“So although the latest move is a step in the right direction, measures should be taken at a much earlier stage to minimise financial impact and misery.

“Customers have a part to play in this too. If their circumstances change and they know they will have financial problems including their credit card balance, they should contact their card company to discuss at the earliest opportunity.

“Credit cards were meant to be a tool to help you manage your personal cashflow – to cover unexpected expenses or help finance large purchases over, say, two to three months.

“But these days some people use them more like a loan with the balance frequently close to the limit.”

Minimum repayments at 5% would help clear balances quicker