The FCA recently enforced new credit card rules to cut down on persistent credit card debt. But are they doing enough? Quick Loans Express explores credit card debt and whether the new FCA regulations will really help consumers.
New Credit Card Rules 2018
In 2017, the average debt per UK household – including mortgages – was £58,540. This number includes the persistent credit card debt of around 3.3 million UK customers. The FCA defines persistent credit card debt as paying more in interest and charges than the actual repayment balance over 18 months. To tackle the credit card debt crisis, the FCA has instituted new regulations like they did in the payday loans industry. Quick Loans Express, a fast cash loan lender explores the new credit card rules and evaluates if they will help tackle the vicious cycle of debt.
How Bad Is Credit Card Debt in the UK?
According to the FCA, 60% of UK consumers use a credit card – that’s 30 million people! Of those, 3.3 million are in persistent debt. 89% who were in credit card debt 2 years ago are still stuck in debt. It is not uncommon for consumers to shift debt from one credit card to another. The FCA revealed the alarming fact that cardholders pay an average of £2.50 in interest and charges for every £1 borrowed. This plunges a huge number of people into an endless debt trap. The Bank of England and the FCA want to proactively turn this situation around so the UK can start climbing out of debt rather than falling deeper into it.
Was There a Need for Credit Card Rule Changes?
Up until now, credit card firms have had few precautions to prevent debt and even fewer resources to help customers out of credit card debt. This is because continuous consumer debt is profitable for these firms. Therefore, the FCA felt that credit card firms needed stricter regulations to protect people wallowing in debt. The FCA also regulates payday loans online and other financial services with consumers’ best interests in mind.
Furthermore, the FCA and Bank of England are concerned that people view credit cards as long-term loans they don’t have to repay. The regulatory board and debt charities recognise that people don’t see credit cards as credit – rather, they view them as an extension of their wage. Consumers accustomed to swiping their cards without restraint don’t think about the consequences. Furthermore, they don’t realise they are borrowing money that doesn’t belong to them.
What Are the New Rules?
The FCA ruled that British banks should help people pay off their credit card loans. Christopher Woolard, from the Financial Conduct Authority, told the BBC that this decision would first and foremost help customers break the cycle of persistent debt. Ultimately, it will ensure consumers who cannot afford to repay more quickly get the help they so desperately need.
- Firstly, Credit card firms should suspend a customer’s credit card if they fail to make any repayments.
- Secondly, under the FCA’s new credit card rules, the credit card firm must contact the customer after 18 months of persistent debt. At this time, credit card firms should suggest to their customers to speed up their repayments and explain the benefits like saving on interest. If there is no change after several prompts by the banks, the FCA expects the banks to show forbearance and lessen the debt load in some way. For example, reducing, waiving or cancelling any interest charges over a reasonable period.
- After 12 months of persistent debt, the credit card firm cannnot increase a customer’s credit limit. A total of 1.4 million accounts will not receive the offer of increasing their limit. Hopefully, this will stop the large-scale downward spiral into debt for many UK consumers.
- Finally, credit card firms must enable customers to opt out of the automatic credit limit increases on their credit cards.
When Were the New Regulations Introduced?
The new regulations came into force in March 2018, but credit card companies had until September 2018 to comply. Any banks and credit card firms that do not comply with the regulations in the future face hefty fines.
Will the New Rules Help?
Debt charities consider these updated regulations a step in the right direction towards battling consumer debt. However, they warn consumers that it may take time to see the benefits in their personal finances. StepChange claims that these new regulations do not protect new customers from falling down the slippery slope into debt in the first place. They argue that more work needs to be done to change the way people view and use credit cards fundamentally. “The proposals fall short of requiring firms to change the way that they offer credit card borrowing to new borrowers. The risk of building up expensive, long term debt remains,” StepChange said.