Credit card firms must tackle debt

You need to act if provider sends warning letter

IF you’ve had a letter from your credit card firm regarding the outstanding balance on your card, don’t worry – but don’t ignore it either, warns StepChange Debt Charity.

You’ve received this because you are classed as being in persistent debt – that means you are paying more in interest and charges than you have repaid on the amount you have borrowed.

The letters are designed to nudge you to take action to get the debt repaid quicker and cheaper.

The Financial Conduct Authority has brought in new rules forcing card firms to help those who are trapped paying vast sums of interest and charges on credit cards.

Your provider may ask you to repay a higher amount each month so you are tackling the debt, rather than just paying interest. And they may be warning you that you risk having your card cancelled if you continue making low repayments.

While suspending your card is a last resort, simply ignoring the correspondence from your card provider, or not making any attempt to increase your monthly payments, will make this outcome more likely.

The problem is that minimum payments on credit cards are not realistic as they typically only cover the interest charges and a tiny bit of the outstanding debt – not enough to tackle the debt and bring it down quickly enough.

This works really well for card providers as it rakes in vast sums of interest, but it means people who don’t clear balances in full each month can end up trapped in debt for years on end.

If you have a card with a balance of £2,000 with a typical 19.9% APR, and you pay just the minimum repayment each month, you will be trapped in debt for 18 years and eight months – and you’ll pay £2,195 in interest charges on top of your balance. On a £5,000 balance you’ll be trapped in debt for 24 years and three months, and cough up £5,668 in interest.

GET OUT OF DEBT QUICKER AND CHEAPER

■ If you’ve got a letter from your card provider it’s time to take control yourself.

■ Stop spending and building up more debt.

■ Even paying a small amount extra each month can have a big impact on clearing the debt. Using the example of a £2,000 balance at 19.9% APR:

■ Pay an extra £10 a month = being debt free in seven years and six months and paying £1,190 in interest.

■ An extra £20 a month = debt free in five years and one month and £846 in interest.

■ An extra £50 a month = debt free in two years and eight months and £455 in interest.

■ If you can take out a 0% balance transfer credit card, you will effectively freeze interest over the term. There’s usually a one-off fee, typically 3% of your balance. But every other penny you pay goes towards the debt. Work out how much you need to repay each month to clear the debt during the 0% deal and set up a standing order for that amount. Don’t be tempted to spend on the card.

■ If you need a more structured approach a personal loan may work better for you – with fixed regular repayments over a fixed term. Ensure you can easily afford the repayments each month.

■ If you’re struggling with debt, get free, independent help from your local Citizens Advice, call the National Debtline on 0808 808 4000, or get in touch with StepChange Debt Charity on 0800 138 1111/stepchange.org.

StepChange has a dedicated team for persistent debt enquiries on 0300 303 2517.