“Persistent debt” credit card reminders now landing on doormats

But there’s little evidence yet of progress, says StepChange

_{29 May 2019}

• People experiencing what the Financial Conduct Authority calls “persistent debt” [see note 1 to editors] on their credit cards will receive their second reminder to take action by Saturday 1 June if they have reached 27 months of paying more in interest and charges than they have paid off from their balance.
• If people are still in persistent debt after 36 months, from next March card providers will require them to enter into repayment plans, and may suspend their cards.
• Based on pilot project experience, StepChange Debt Charity is concerned that the new reminders and credit card providers’ calls may not yet be having much effect.
• Communication from card providers varies significantly, and the call to action is not always clear. People may not yet realise that if they don’t take action, their cards may be withdrawn and a repayment plan will be imposed by their card providers.
• StepChange warns that many people seem set to reach a cliff edge moment further down the line when they are formally required (from next March) to make higher payments to pay down their debt.
• StepChange calls on firms and the regulator to consider what more they can do to offer not just clear communication, but also real benefits to consumers that will encourage them to take action now.
• The aim should be to avert an inexorable drift towards the 36-month scenario where people are taken by surprise by measures such as cards being withdrawn and repayment plans required.
• Through June, the charity will be raising awareness of the need to consider what action to take through a “Minimum payment awareness month”, and will be continuing to offer its bespoke service to support people who have been receiving reminders and are not sure what to do [see note 2 to editors].

Between the first quarter of 2015 (after the start of the FCA credit card market study in November 2014) and the first quarter of 2019, the proportion of StepChange clients with credit card debt - not necessarily “persistent” debt as defined by the FCA - has increased by 3% to 68%.

Among people with sub-prime credit cards, new polling research for StepChange undertaken by YouGov suggests that 10% recall being contacted by their card provider about their persistent debt [see note 3 to editors].

StepChange has been running a pilot project to give support and guidance to people receiving “persistent debt” communications from their card providers (which are required, among other things, to signpost people to debt advice services).

On the basis of experience to date, with only a slow trickle of enquiries into the pilot, the charity does not believe that the reminders are so far resulting in significant customer action. However, among those who have sought guidance about the persistent communication, around a third have actually needed full debt advice. This suggests that there may be a large number of people who have not previously considered themselves to be in problem debt or sought advice, but who will need help.

People may face a particular problem if they have multiple credit cards (the average StepChange client has two or three cards).

StepChange believes both firms and the FCA should therefore consider what more they can do to give earlier and better support to people who are only making minimum payments. There is a need to recognise that, for some consumers, the reason they may not be taking action could be because they simply cannot afford to pay more – even if they are currently keeping their head above water.

Communications encouraging them to pay more may therefore leave them unsure whether there is any point contacting the firm.

The charity suspects that many people who fall into the “persistent debt” definition, but who are managing to pay their bills and minimum payments and do not see themselves as having problem debt, may not see any realistic or attractive alternative to “wait and see”.

There may also be other reasons why people might not be taking action to increase their payments, not related to affordability. One of these may be the effectiveness with which firms are communicating. There is no standardised approach to communication, nor any publicly available insight into which approaches are encouraging the highest levels of customer engagement and action.

Phil Andrew, StepChange Debt Charity CEO, says:

"The regulator’s approach to how credit card providers should address longstanding credit card debt initially relies on getting them to encourage people to increase their payments voluntarily. We don’t know how many people have increased their credit card payments as a result of the communications they’ve received, but our sense is that not many have. This begs the question about whether that’s because they haven’t realised the importance of doing so, haven’t noticed their firm’s communications, or simply can’t afford to pay more. We think the regulator should try to find out.

Our own persistent debt pilot service hasn’t dealt with enough people to give a reliable understanding of the landscape, but has certainly given us worrying cause for concern about the risk of people hitting the buffers hard at 36 months, when actions become compulsory. At this point there may be significant numbers of people with “hidden” problem debt who are coping on a minimum payment basis but could tip over into difficulty once higher payments are required, and may need help and forbearance at that point.

We stand ready to help anyone who may be feeling trapped in this situation, and we’re keen to work with creditors and the regulator to develop a better understanding of persistent debt customers well in advance of when the first of them start reaching the 36-month trigger point from next March. In light of the lack of visible progress so far, we think the FCA should provide an update on the effectiveness of remedies to reduce persistent debt in September – the first anniversary of the first set of notices."

Given that the FCA’s requirements on how firms should intervene when they identify customers in persistent debt are now being rolled out beyond credit cards to catalogue credit and store cards, StepChange thinks it is important that the FCA should review the effectiveness of the 18-month and 27-month reminder process, to identify how effectively encouragements to action are resulting in pulling people out of the likelihood of still being in persistent debt at the 36-month stage. This would also enable the regulator and firms to assess whether they need refining – for example, by introducing a more standardised form of communication, based on an understanding of “what works”.

The charity will be running its own “minimum payment awareness month” throughout June, where people will be able to get lots of useful help, tips and guidance on the steps they might be able to take to help address their credit card debt. People can visit the website, follow the charity on Twitter at @StepChange or sign up to the MoneyAware newsletter to gain access to this information.

Notes to editors:

1. Persistent debt on credit cards is defined as having paid more in interest and charges over an 18 month period than you have paid off the balance. It triggers a communication from the card provider to take action to pay more on a voluntary basis, and tells people what will happen later if they don’t do this. At 27 months, a further reminder is sent to people who are still in persistent debt. If people remain in persistent debt at 36 months - 18 months after the first communication from their card provider about it their card may be withdrawn and the card provider will put in place a repayment plan designed to pay down the balance over a 3-4 year period. See https://www.fca.org.uk/news/press-releases/new-credit-card-rules-introduced-fca
2. StepChange’s consumer guide on persistent debt is at www.stepchange.org/persistent-debt
3. Figures are from YouGov Plc.  Total sample size was 5,326 adults. Fieldwork was undertaken between 29th April - 2nd May 2019.  The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).