Tackling persistent debt

This week our CFO, Robustiano Tubio, talks about persistent debt and how Tymit is preventing customers from falling into this dangerous trap.

What is persistent debt?

If your credit card debt has attracted more interest, fees and charges than the amount you’ve repaid over the last 18 months, then you are in persistent debt. 

The FCA has put a lot of research into this space, studying 34 million cardholders in the UK over a period of 5 years and surveying more than 40,000 consumers (Credit Card Market Study’s final report in 2016). This research has led to a comprehensive set of measures that came into force on 1st March 2018. 

Figures show that customers in persistent debt pay on average around £2.50 in interest and charges for every £1 that they repay of their borrowing. 

The result is that banks and consumer lending companies have few incentives to help these customers get out of debt, simply because they have been very profitable.

How big is the problem?

The Credit Card Market Study shows that there are a total of 4 million customers (12% of the total outstanding cards) that have shown persistent debt signs and they further break down into the following three categories: 

1. There are 2 million credit cardholders that are in serious or severe arrears. 
2. A further 2 million cardholders have persistent debt issues. 
3. An additional 1.6 million consumers only pay their minimum payments systematically every month and are therefore prone to becoming persistent debt holders. 

The new measures implemented by the FCA are expected to save billions of pounds for millions of customers in the UK, with indicative figures between £310m and £1.3bn a year in lower interest charges.

What exactly has been done to protect the UK consumer?

The FCA is forcing banks and consumer lenders alike, to offer persistent debt customers prescriptive steps to help them clear their credit card balances over time.

18 months into persistent debt: Your credit card provider has to contact you and offer you help. 

27 months into persistent debt: Your card provider needs to send a reminder if they think that you’re still likely to be in persistent debt at 36 months. They’ll look at your pattern of payments to help them decide this.

36 months into persistent debt: If you’re still in persistent debt at 36 months, they must contact you again and give you options for increasing payments so that you can repay the balance sooner.

Can you guess the easiest way to achieve this? 

Instalments!! We will come back to why this is so relevant…read on. 

How did the experiment go in practice?

The regulation passed says that if you can’t afford to repay your debt in instalments, your provider must take steps to make sure your fees don’t mount up. This is called ‘forbearance’ and includes things like reducing, waiving or cancelling any interest, fees or charges.

However, the FCA has recently warned credit card firms against the blanket suspension of cards as that could put people into more trouble as opposed to helping them ease the burden. Suspension of credit lines can only be done after a customer has failed to respond to the card issuer’s contact and in cases where there is an objective justification. 

Renowned finance guru Martin Lewis commented ‘Persistent debt letters are a blunt tool... do what's right for you and don't let it stress you' as part of an article published by MoneySavingsExpert. 

Recent update on the back of the COVID-19 outbreak

Persistent debt rules, which were enforceable from March 2020, have been recently put on hold by the FCA who have announced that customers will have until October 2020 to respond to communication from their card issuer regarding persistent debt. In addition, FCA have placed a blanket ban on any credit card suspension due to persistent debt, before October 2020 to help consumers with their finances, in light of the potential economic downturn of the coronavirus outbreak. 

Commenting on this announcement by the FCA, Eleanor Williams, finance expert at Moneyfacts.co.uk said: “Those who may have already been finding it difficult to keep up with their minimum credit card payments before the COVID-19 outbreak may find some comfort in the FCA’s decision to suspend its credit card persistent debt rules. If anyone is worried about managing their finances in this difficult time, they should consider speaking with an advisory service and contacting their finance provider to discuss possible solutions to any concerns as early as possible.”

Tymit prevents you from ever falling into persistent debt

Just like any other regulated credit card issuer, we are following all the latest guidance and rules being published by the FCA. However, as a start-up that only launched our product publicly in December, we wouldn’t see a persistent debt customer for at least another 12 months. 

But we never will, because Tymit customers cannot fall into persistent debt. Why? Because we’ve done away with minimum payments and revolving balances altogether. Every time you use your Tymit card, the app will prompt you to choose a payment plan of 1, 3 (both at 0% APR), 6, 12 or 24 months. As a result, you will always have a plan to repay your total balance, with clear insights on the interest charges if any. No other credit card can offer this!

The rise of the instalments

A recent study by Kearney has shown a growing appetite for point of sale financing, particularly among younger consumers. the study determined that: 

“More than 60% of Millennials have used point of sale financing arrangements that allow payments in instalments, and of those 42% who have used them more than once. Millennials are also the age group most likely to have used these services at least three times during the past five years. A majority of consumers in Generation X (those aged 39 to 54) have also used these services, with more than one in three (34%) having done so more than once.

Almost six out of 10 (58 %) would use point of sale credit for a purchase over £250, whether or not they could pay the full price up front—including 12% who would use the credit to trade up and buy a more expensive product.

More than one in three consumers (37%) said that when making a £250 purchase they would prefer to buy from a retailer that offered a “buy now, pay later” option. Millennials were most likely to say this, with more than half (51%) saying this would be the case (as did 42% of Generation Z respondents).”

In summary, we have seen it is a growing market, with consumers (particularly younger consumers) getting used to paying in instalments. 

Click here to read the full report.

Conclusion

We are yet to see the results of the persistent debt regulation once it is fully enforced, taking into account potential delays there may be with coronavirus. However, initial anecdotal evidence suggests that the easiest way to help customers escape persistent debt is to enter into a separate instalment arrangement (a.k.a. a personal loan). 

In addition, point of sale financing options have been very popular in the recent past taking market share away from traditional revolving credit options like overdrafts and credit cards. 

Consumer market forces are drifting towards instalment options, because they provide more transparency and visibility which in turn provide customers with more control over their finances. We should all embrace that change, to help improve consumer’s financial wellness.