New rules to help credit card customers 'break cycle of persistent debt'
New rules for credit card companies should save customers up to £1.3 billion per year in lower interest charges, the City regulator has said.
Some people sitting in debt for a long period could ultimately face their credit card being suspended if they do not change their repayment pattern.
In some cases when people are in persistent debt, charges may be reduced or waived.
The Financial Conduct Authority (FCA) set out the regulations as it published its final policy statement on new rules for the credit card market, to give more protection for credit card customers in persistent debt or at risk of financial difficulties.
Christopher Woolard, director of strategy and competition at the FCA, said: "Under these new rules firms will have to help customers to break the cycle of persistent debt and ensure customers who cannot afford to repay more quickly are given help."
Customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing, the FCA said.
It said that, for example, someone borrowing £3,000 on a credit card with an APR of 19% and only making minimum repayments starting at £74 per month and reducing over time could take 27 years and seven months to pay it off. The interest paid would be £4,192.
It is estimated there are more than three million credit cardholders with four million accounts in persistent debt and firms have few incentives to help these customers because they are profitable, according to the regulator.
The new rules will mean firms must take a series of escalating steps to help customers who are making low repayments over a long period, starting when the customer has been in persistent debt over 18 months.
After this time, firms need to contact customers prompting them to change their repayment and informing them their card may ultimately be suspended if they do not change their repayment pattern.
Once a consumer has been in persistent debt for 36 months, their provider will have to offer them a way to repay their balance in a reasonable period.
If they are unable to repay the firm must show the customer forbearance. This may include reducing, waiving or cancelling any interest, fees or charges.
The FCA estimates the changes will save consumers between £310 million and £1.3 billion a year in lower interest charges.
The new rules come into force on Thursday March 1, but firms have until September 1 to comply.
The changes follow a study which analysed the accounts of 34 million credit card customers over a period of five years, and surveyed nearly 40,000 consumers.
Credit card firms have also agreed to voluntary measures, which will give customers control over increases to their credit limit.
Under the measures agreed by credit card firms customers can opt out from receiving automatic credit limit increases.
Customers in persistent debt for 12 months will not be offered credit limit increases - which should result in around 1.4 million accounts per year not receiving such offers - the FCA said.