MSE News: Credit card firms could be forced to help customers in persistent debt

Legacy_user

Customers who find themselves in persistent credit card debt could benefit from initial savings of up to £1.3bn a year...

Read the full story:
'Credit card firms forced to help customers in persistent debt, under FCA plans'

Click reply below to discuss. If you haven’t already, join the forum to reply. If you aren’t sure how it all works, read our New to Forum? Intro Guide.

jimsplodge

How exactly are they going to deem a customer cannot afford to increase their payments? Credit cards generally have very low minimum payments, and paying just a tiny amount of money on top can dramatically slash the interest, charges and the life of the debt.

Will they just take the word of the customer for it? Or will they monitor spending and what its on in order to deem affordability? For example, if they see M&S food, instead of Aldi on a statement, they can then afford it, or else they shouldn't be shopping there and paying them back instead!

Will they enforce stopping smoking, cancelling subscription television or making them turn the thermostat down before they decide to write of debts? Is it even ethical to demand to know information such as that? If however, those of us abiding citizens who sometimes may struggle with the odd bill, but generally are able to pay off the pittance that the credit card companies ask (providing the debt is properly managed), will not get any debt or charges written off for being normal, and not overspending.

Will it ever be fair? or will it just reward those who have overspent and allow them to continue underpaying, while the rest of us have to shell out interest, or suffer shorter intro deals in order to pay for it?

Just more questions!

Arthog

This news item is reminiscent of the credit crisis of 2008! Has nothing been learned?
This issue is being looked at from the wrong direction! Why is nobody talking about preventing the debt from happening in the first place?


The Credit card companies must give credit limits which reflect the income of the card holder, taking into account all cards held.
They must also allow card holders to repay any amount above the minimum, rather than all-or-next-to-nothing by D/D as at present.


Will anything change?

jonesMUFCforever

There will be a cost for this - and who will pay?
Yep people who take advantage of deals with credit cards - so either the annual rate on cards will increase (they will anyway when base rate starts to rise) or things like balance transfer fees will increase or the great deals out there won't be there anymore.

jamesd

Arthog wrote: »

This issue is being looked at from the wrong! Why is nobody talking about preventing the debt from happening in the first place?

Because that doesn't make sense. Credit card debt is a useful and highly valuable tool. Problem debt is a problem but most credit card borrowers don't have problem debts. It's the problem debt area that can merit attention, not simply having debt.

Among other things profit from it paid for about half of my property deposit and is making me more than £6,000 a year on more than £60,000 of credit card borrowing, which exceeds my annual base pay or mortgage balance. Debt isn't a problem and nor is having total card limits that are higher than 90% of my annual gross income from all sources. Taking into account overdraft facilities my unsecured borrowing capability exceeds my gross income or the value of the low cost home I own.

My investments are worth several times the card borrowing. I'd just sell some investments if I had a reason to reduce my borrowing faster than my net income allowed. As it is I'll be happy to continue to increase it as long as I can get it at profitable rates. But I'm unusual: most consumers haven't had a savings ratio above 60% for a decade and don't have more than 80% of their base pay in annual pension contributions. I do. Part of the challenge for the FCA is helping those who need help while not hurting those who don't.

Arthog wrote: »

The Credit card companies must give credit limits which reflect the income of the card holder, taking into account all cards held.
They must also allow card holders to repay any amount above the minimum, rather than all-or-next-to-nothing by D/D as at present.

Will anything change?

Credit card companies already do consider all unsecured borrowing facilities and income, though having borrowing and facilities well above income is fine when it's not a problem for the borrower.

Being able to set amounts above minimum would be handy. I'd set it to minpay plus a penny so that the minimum payment made flag wouldn't be set to give a misleading indication of my ability to pay. Or whatever it takes above that to avoid it being set, if the increase isn't excessive. Some companies will still set the flag if the payment is only a penny more. Others give you a time window of only a few days to make that extra payment or they undo it by reducing the amount of the direct debit by a penny.

jamesd

It appears that the FCA is proposing to attack customers who are trying to repay their debt as cheaply and rapidly as possible and increase their cost of borrowing while suspending their use of credit from the cheapest sources.

The problem comes because of promotional deals and snowballing, making minimum payments on the cheapest debt to target maximum payments on the most costly or problematic debt. That is combined with an apparent "ignore the big picture, each card issuer to pretend it's the only debt holder" approach. Such customers can afford to pay more than the minimum but should not do so because it increases their borrowing cost, thereby causing the to be treated as uncooperative and have their cheapest credit suspended or cancelled, with negative marks made at credit reference agencies to further increase their future cost of credit.

"1.29 In order to deliver the appropriate assistance for customers in persistent debt, we are proposing
the following:

• A definition of persistent debt that identifies customers paying more in interest and charges
than principal over an 18 month period

• Our analysis shows that during the period covered by the CCMS dataset there were around
4 million accounts in persistent debt at any given time

At 18 months:
• Customers in this situation would be made aware that increasing their current rate of
repayment would reduce their cost of borrowing and the time taken to repay. They would
be informed that continuing low repayments for a further 18 months may mean the firm
suspends use of the card and makes a report to a credit reference agency (CRA)

At 27-28 months:
• If customers’ repayments up to this point indicated they were likely to remain in persistent
debt at the 36 month point, firms would be required to repeat the steps required at
18!months

At 36 months:
• If customers are still in persistent debt after a further 18 months, and thus have repaid more
in interest and charges than principal for two consecutive 18 month periods, firms must
take steps to help them repay their outstanding balances more quickly. They must write to
the customer proposing options for repayment plans, based on repaying their debt over
a reasonable period, usually between three and four years. The customer would be made
aware that their use of the card will be suspended unless they engage with the firm.

• Where customers inform the firm that they cannot afford any of the proposed payment
options to repay the debt within a reasonable period, firms must exercise forbearance to
assist the customer to repay the debt more quickly. This may include a reduction in the
interest rate being charged

• Where forbearance is shown, we expect it will generally be necessary for the firm to suspend
the use of the card

• Customers who confirm they can afford to make increased repayments but decline to do
so, and customers who do not respond to the firm, would have their use of the card
suspended or cancelled

• The interventions would continue until the customer has repaid the balance they had at
36 months."

The FCA does appear to be correct in this, unfortunately:

"1.33 This approach is intended to rebalance incentives on firms and customers. We expect firms
will want to encourage customers to repay more quickly to avoid the costs of the 36 month
intervention, and that customers will want to retain use of their card where possible."

Yes, we'll have to modify instructions to tell people to deliberately repay more than they have to on the cheapest credit so they don't get penalised more than necessary for doing the right thing. That's not helpful. The FCA should not be making rules that punish those using the optimal debt reduction strategy.

Besides just being undesirable, the three to four year to schedule is often unrealistic for snowballing to get to the repayment of the cheapest debts, even if that is desirable. Those cheapest debts may not be card debts, it's entirely possible that cards might be the subject of penalties when loans or mortgages are more expensive and optimal strategy for many years may be high and maintained card debt because it's cheaper, after allowing for deal discounts.

jamesd

The FCA also appears to be proposing an FCA silo mentality award for itself with this part of 1.29:

"Customers who confirm they can afford to make increased repayments but decline to do
so, and customers who do not respond to the firm, would have their use of the card
suspended or cancelled"

You can afford to pay more, choose not to, either overall or on just this one or some cards, so you get punished because you're finding credit useful and want to keep using it?

Even if you're making or saving more money than the interest and fees that you're paying, you get to have your card suspended or cancelled just because of the lack of a holistic view of your situation.

Not sure why the FCA thinks it's a good idea to have someone making or saving something like £6,000 a year from card use have their cards suspended or cancelled because they are paying a thousand or two in interest and fees (roughly my own situation) and have every reason not to repay because it would make them worse off to do it. Such things can be sole trader business funding, or things like stoozing into savings, mortgage offset accounts or investments of appropriate risk level.

So it seems that those who can make or save money from keeping high card balances to save or make money are going to have to throw away some money to game the FCA rules.

Would be nice if the FCA didn't in its proposals seem take the view that just having credit card debt is bad and it has to be repaid over three or four years regardless of whether that is optimal strategy for the customer.

jamesd

The FCA also appears to have a silo product type approach, labelling the card product as appropriate only for short term borrowing, when in fact it's often the cheapest for medium term five year plus and longer borrowing due to the level of competition in that market.

So we see sensible consumer guides like those here at MSE mentioning that cards are often cheaper than loans and even mortgages for some durations and amounts (like say stoozing into an offset account) while the FCA appears to be taking the approach that consumers must not be allowed to benefit from the competition in the card market that can produce lower borrowing costs than alternative product types, but instead must be forced to repay the cheaper card borrowing even though it makes them worse off.

Sad that the FCA appears to plan to require card issuers to lie to their customers:

"At 18 months:
• Customers in this situation would be made aware that increasing their current rate of
repayment would reduce their cost of borrowing and the time taken to repay."

The lie is that this may be the cheapest borrowing the customer has and paying any more than the minimum in that situation will increase the cost of borrowing, not decrease it.

The FCA should at least let card issuers be honest and write that "increasing your rate of repayment will cut the amount of interest or fees that you pay on this card but may increase your overall cost of credit or make you worse off in other ways".

From two card issuers I've got two cards, four combined. I suppose we'll also see issuers as well as the FCA taking a one card at a time silo approach and penalising customers who pay down the most expensive debt even when both or more than two are issued by them so they can see more of the picture of the customer's financial situation.

I wonder whether the FCA rules will allow firms to notice that a customer's overdraft with the firm is more expensive than the two or more cards or whether the firm will have to suspend the cards and increase or maintain the more costly overdraft use? Or will it be the usual one product type silo rulemaking approach that seems to be the norm?

The TCF cases that result could be frustratingly sad, with the FCA requiring one thing then the FOS ordering the firm to pay redress for not treating the customer fairly over its whole product range of interactions. Unless the FCA rules give firms a treat your customer unfairly escape clause.

jamesd

I'm only part way through this so maybe there's some great set of saving rules later but it's so far looking likely to significantly harm non-target groups who don't repay much because that is the correct choice, not a problem.

Or maybe simply their free and informed choice to not use the cheapest option.

jamesd

Another case where one card at a time silo rulemaking is going to harm consumers:

"1.42 In addition, credit card firms, following discussions facilitated by UKCA, have undertaken to
make changes to how they offer unsolicited credit limit increases (UCLIs) to customers who are
making systematic minimum repayments. After eight months of making minimum repayments
customers will not receive a credit limit increase unless they expressly opt in (and the other
requirements, including in relation to the credit worthiness assessment, are met). After
14 months of minimum repayment, customers will no longer receive UCLI offers."

Snowballing again: correctly don't pay more than the minimum on your cheapest borrowing sources and you won't get automatic increases in credit limit that would save you money by making your overall, rather than one card silo, debt cheaper.

At least this one is easy to game: pay more than the minimum then spend enough so that the balance is not reduced by much. A penny might suffice. If it has to be more than a penny unfortunately you'll have to accept reducing some of the cheaper debt first, though maybe a balance transfer offer will come along to undo the harm caused by this rule.

Your statutory credit report will tell you the months in which most cards have reported that you made a minimum payment. So will some of the free online versions. So something else to manage but at least you should get the reporting you need.

Maybe card issuers might be helpful and tell you how many months of minimum payments you've made. Given the draconian penalties in some of the other rules that's something I expect TCF to require.

jamesd

I don't agree with the FCAs equality opinion, since it seems to be clearly wrong in some cases:

"Overall, we do not consider that the proposals adversely impact any of the groups with
protected characteristics – i.e. age, disability, sex, marriage or civil partnership, pregnancy and
maternity, race, religion and belief, sexual orientation and gender reassignment

As I've explained in my earlier replies, the FCA seems to be requiring a one card at a time approach that disregards a person's overall cost of credit across multiple products and product types. This will then in many cases cause the cheapest credit source to be restricted as consumers correctly choose to pay off the most expensive borrowing first, if any debt reduction is sensible, remembering that debt can be profitable not loss making overall for a consumer.

The consumers who are most likely to be impacted are those in real financial difficulties or with temporarily or long term reduced income or increased expenses. This is because they will have less opportunity to reduce the debt on one card by taking out another at a competitive rate. Sub-prime cards with relatively high rates might be needed to reduce borrowing on lower cost cards to avoid being trapped with overall more costly borrowing by the FCA rules. That costly debt is wasteful but beats having access to cheaper card debt frozen or completely withdrawn.

So, I expect higher adverse impact in the form of higher borrowing costs and reduced access to credit for people with these protected characteristics:

1. Pregnancy and maternity: these typically cause temporarily reduced income or higher expenses like childcare due to less work or costs of returning to work. This then temporarily reduces the ability to get more credit for the duration of the condition, making the person more likely to be trapped with the more costly borrowing. Of greater impact for single parents than those in relationships, who do not have a partner, so also a negative effect based indirectly on marital and civil partnership status and sexual orientation, for which marriage is a partial proxy.

2. Marriage and civil partnership, lack of, and the role of marriage as a partial proxy for sexual orientation. Within a marriage or civil partnership one partner can choose to reduce the debt of the other by taking out new borrowing and preventing the other from being trapped by the penalties in the FCA rules. This avenue is less likely to be available to those not in the legally shared asset protection afforded by marriage in particular, since outside such legal ties there's a full transfer of debt from one person to another if they borrow to repay so some else's debt and the relationship ends.

3. Age. Similar lack of ability to get alternative credit potential, so more chance of being caught out by the rules. At young ages due to limited credit history and relatively unstable work making temporary reduced income for many years more likely. Nearer to end of life limited income can have a similar effect.

4. Disability. Two aspects, sudden and on going. Sudden can produce disrupted income and lead to the higher cost of credit traps. Ongoing in the mental health area, particularly depression, seems likely to produce negative reactions due to the use of threats to report to credit reference agencies and suspend or withdraw credit. Threats don't seem like the best tool to be using and those with genuine debt trouble seem more likely to be suffering from depression as a consequence of the debt.

5. Gender reassignment. Female to male will produce a later state pension age. While this is no different from having been male throughout, the reassignment may mean that it hasn't been as well financially planned for. Same general issues of blocking access to new credit that could allow avoiding being caught out by the new restrictions, the only tens of people a year at most could be affected.

The general theme is differences that either directly or indirectly cause those in the protected groups to be at greater risk of being unable to avoid the new restrictions by just applying for more credit so they can reduce the balance on existing cards or debts.