Persistent Debt – What is it? and how to get rid of it

What do with a ‘persistent debt’ warning

Have you been sent a letter by your bank or credit card company that mentions ‘persistent debt’? What is persistent debt? What does the letter mean? And what are your options? Here’s our guide.

What is persistent debt?

Credit card, catalogue and store card debt needs to be paid off. If you don’t pay off the full balance each month, you’ll pay interest. You may also pay other charges and fees. If you’re regularly paying more in interest, fees and charges each month than you are repaying, you’ll be classed as being in ‘persistent debt’ following a change in rules in early 2020 by the Financial Conduct Authority (FCA).

What are the new persistent debt rules?

The FCA has said that anyone paying more in interest, fees and charges than they are repaying over a period of 18 months should be encouraged to pay more. Although initially targeted at credit cards, the FCA has extended its ruling to include store card and catalogue payments.

Why have I received a persistent debt letter?

The rule change means the credit, store and catalogue credit companies need to get in touch with you to let you know about your debt and to encourage you pay it off quicker. The letter/alert will include:

• A request to consider whether you can afford to pay more
• An illustration of the implications of persistent debt, explaining how much persistent debt could be costing you and what might happen if you don’t pay more than the minimum (see below)
• Alternative payment options; and
• Information about how to get advice if you’re struggling with debt

Why does persistent debt matter?

Paying only the minimum amount off your credit, store or catalogue debt means you’ll take much longer to repay the debt in full than you would if you paid a little more each month. And because you take longer, you pay interest for much longer too. In many cases, you could find that the interest you pay is far more than the original debt.

On its website, Barclaycard provides a helpful illustration of the problem. Its example assumes a  balance of £5,000 with an APR of 19.9%. Pay the minimum payment of £125 per month (which will gradually reduce as the balance falls) and you’ll take 31 years and 11 months to pay off the full debt. During that time, you will have paid £7,422 in interest.

Agree a personalised payment plan, however, and with a fixed payment of £149 each month you’ll have cleared the debt in four years. The total interest will be £2,054.

So for £24 extra each month, you could save more than £5,000 in interest and slice 27 years off your repayment period.

Is this a typical example?

If anything, it’s a conservative example. Many store cards, catalogues and credit cards charge higher interest rates than Barclaycard, so you could find that by agreeing a similar repayment plan with your company, you could save even more.

Do persistent debt rules mean I’m not allowed to make the minimum payment?

No. You can still pay the minimum. But if you only make the minimum payment for a prolonged period your credit card can increase your monthly minimum or freeze the card (see below).

Provided you manage your repayments in a way that avoids triggering persistent debt measures, you can continue paying the minimum amount most of the time – although it would make sense to pay off more whenever you can.

Does a persistent debt letter mean I’m in trouble?

No. A persistent debt notice is about helping prevent problem debt and lots of people will be receiving letters like this. Provided you continue to meet your minimum payments you’re doing nothing ‘wrong’, but your debt will be costing you far more than it could.

Does a persistent debt letter mean I have too much debt?

Not necessarily. It could simply be a timely reminder that there are cheaper, quicker ways of managing the debt. But if you do receive a persistent debt letter, it is worth taking a step back to look at your debt and assess the situation. If things are spiralling out of control, now is the time to act (see ‘What happens if I can’t afford to pay off my persistent debt?’ below).

Should I repay more than my monthly minimum?

Yes, if you can. As the example from Barclaycard showed earlier, paying debt down faster can save you a fortune in interest payments and cut years off your repayments. And you only need to repay a few pounds more each month to make a big difference.

Is this a one off?

No. Your credit card company will keep a permanent eye on your account from now on. If you meet the criteria for persistent debt at any point, they’ll get in touch.

Can I keep using my credit or store card?

Generally, yes. Of course, the more you add to your debt, the higher your minimum payment will be and the greater the interest. Every pound you add to your debt could increase your risk of falling into persistent debt.

If you remain in persistent debt for 36 months the card company could increase your monthly payment or suspend your card. Companies will treat this as a last resort, but suspension would be more likely where you have not made any attempt to increase payments or you have ignored letters and/or alerts.

Why does my balance barely drop when I keep making minimum monthly payments?

Each month’s repayment is made up of two elements, interest and the debt balance. Interest is always paid first, and anything leftover will be put towards paying down the balance.

So the more you pay, the more money can be put towards the actual debt, rather than paying the interest.

The other issue is that the minimum payment reduces with the debt, which not only limits the impact on the debt, but also helps to ‘spin out’ the length of the payment period, sometimes for decades.

How can I get out of persistent debt?

There are lots of ways to escape persistent debt. Here are just some of them. Contact us for more.

Stop spending on the card: As long as you only repay the minimum amount, every pound you add to the card will increase the interest you pay and the time you take to repay it. If you can, remove the card from your phone/purse/wallet and don’t add anything more to it. That won’t resolve the problem but it will prevent it from getting worse.

Increase your monthly payment: As the example earlier illustrated, any additional payment will reduce the interest you pay and the length of time it takes to repay the debt. The more you can pay, the faster the debt will drop. Many card providers offer calculators that can help you understand how much faster you can pay off the debt by adding £10, £20 or more to your payment each month.

Talk to your credit provider: Call your lender and tell them you’re planning to switch your debt to a different company. They may be able to offer you a better deal. If they are unwilling to offer you anything better, consider switching (see below).

Switch to a better rate: If you can’t afford to pay more, you may at least be able to switch to a card that charges less interest. That way, you’ll make more of a dent in the balance with the same payment. Be aware, though, that some offers are only introductory and could cost you more once the offer runs out. You may also be charged a fee for switching your balance, so make sure the deal makes sense.

Arrange a payment plan: Ask your lender to agree a fixed payment plan. You will need to pay more than the minimum to make this work (although it may not be a great deal more), but this could help you cut the debt dramatically.

Ask your credit provider for help: If you’ve exhausted all the above options and are struggling to meet your monthly repayments, talk to your lender and tell them. They may be able to freeze charges, interest or payments for a short period.

What happens if I can’t afford to pay off my persistent debt?

Persistent debt notices can be a valuable warning that your debt is – or has the potential to get – out of control. If you can’t afford to pay more than the minimum payment (or you can’t even afford the minimum) try the steps at ‘How can I get out of persistent debt?’ above.

If none of those work, there’s a good chance you may be struggling to make other payments too. Now’s the time to look at other debt relief options before you start missing payments and receiving letters from debt collection agencies.

In England and Wales, those options could include:

• Debt Relief Order (DRO): Owe less than £20,000 but don’t have many assets? As long as you’re not a homeowner, this could freeze your debts for 12 months and then get them written off.
• Individual Voluntary Arrangement (IVA): You agree to pay back a fixed, affordable amount to your creditors over (usually) 5-7 years. After that time, any outstanding debt will be written off. If you’re a homeowner, you’ll usually be able to keep it providing you keep up the mortgage payments.
• Bankruptcy: Write off your debts and get a fresh start. You may have to make payments towards your bankruptcy and your house may be sold to pay off your debts. Rarely the first debt relief option, but it can be appropriate for some people.

In Scotland, your options could include:

• Protected Trust Deed (also known as a Scottish Trust Deed): The Scottish equivalent of an IVA with repayments over a minimum of 4 years.
• Sequestrations: The Scottish equivalent of bankruptcy.
• Minimal Asset Process: Similar to sequestration, but for those with lower incomes or few assets

Available across the UK:

• Debt Management Plan: You arrange a single monthly payment towards your debt which is shared amongst your creditors.

Don’t let problem debt become a crisis. Use a persistent debt letter as a warning to review your debt payments – and take action before things get out of control. For friendly, expert advice talk to us now.