Struggling credit card borrowers to be offered lower repayments and £500 interest-free overdrafts to be extended
CREDIT card borrowers will be offered lower repayments if they’re still financially struggling following a payment freeze.
Under new proposals published by the financial regulator today, firms will also have to give affected customers longer to pay off £500 interest-free overdrafts.
Lenders will be expected to offer the additional help to those who continue to be negatively impacted by the coronavirus crisis.
The majority of lenders have already been offering payment holidays for an initial three-month period, depending on the circumstances of the individual.
But with this three-month period coming to an end, firms should now contact customers to find out if they can continue to make repayments after their payment holiday.
If they're still struggling, help should then be offered for an additional three months after a payment freeze has finished.
What is a payment holiday and should you apply for one?
PAYMENT holidays are when a lender agrees to pause your monthly repayments for a set amount of time.
This has to be agreed in advance, so don't stop making your repayments until your bank has given you permission to do so.
The majority of lenders are now offering payment holidays, so get in touch with your bank to find out what help it can give you.
Most of the time, it'll require you to fill out an online form.
Typically, payment holidays are offered in extreme circumstances and are designed as an emergency measure to help you through a difficult financial time.
If you think you need to take one, you should speak to your lender to discuss your options - but do note that the break in payments doesn’t remove any debt or financial obligations.
Most lenders will also still charge interest during this time, so be aware that these costs will keep building up.
You should also always continue to make your normal payments if you’re financially able to.
Sue Anderson, head of media at debt charity StepChange, said: “If you can continue to make your normal payments without difficulty, then you should.
“Any temporary measures being offered by lenders don’t remove financial obligations – they are designed as an emergency measure to help you get through a period where your income may have taken a serious knock.
“However, if you need to use them then you shouldn’t hesitate to talk to your lenders.
“While taking a payment break would usually be noted on your credit file, the credit reference agencies have confirmed that, during the current crisis, this should not have a future influence on your credit status.”
It comes as new figures from trade body UK Finance show that 1.2million people had been given a payment holiday on their credit cards and loans, as of last month.
What help is being offered?
Here's what the Financial Conduct Authority (FCA) has proposed:
- Lenders to offer reduced repayments or a complete deferral of repayments to borrowers struggling to repay after three-month freezes.
- For customers who've yet to apply for a payment freeze, the deadline will be extended until 31 October, 2020.
- Lenders to offer lower interest rates on borrowing above interest-free buffers on overdrafts, as well as payment plans, for those with a temporary interest-free overdraft who are still struggling to repay it.
- For customers who've yet to apply for an up to £500 interest-free overdraft, the deadline for this will be extended until 31 October, 2020.
Firms have until June 22, 2020, to get back to the FCA on its proposals.
The FCA then expects to start enforcing the new guidance "shortly after", with a start date to be confirmed once the measures have been finalised.
How to apply for a payment holiday or help with your overdraft
HERE are the help pages for all the major banks so you can see what help you may be eligible for - and how to apply for it.
Credit card holidays
Loan repayment holidays
Overdrafts
If approved, the guidance will apply to credit cards, store cards and catalogue credit, personal loans, and overdrafts.
It won't apply to consumer credit products, such as car finance, high-cost short-term credit, rent-to-own, pawnbroking and buy-now pay-later.
Christopher Woolard, interim chief executive at the FCA, says the new measures will offer additional support for customers who need it.
But he adds that those who can make repayments should continue to do so as otherwise they'll end up owing more in the long-run.
Mr Woolard said: “We have been working closely with other authorities, lenders and debt charities to support consumers in the current emergency.
“The proposals we’ve announced today would provide an expected minimum level of financial support for consumers who remain in, or enter, temporary financial difficulty due to coronavirus.
“Where consumers can afford to make payments, it is in their best long-term interest to do so, but for those who need help, it will be there.”
Any payment freezes that get approved by lenders won't have an impact on the credit file of borrowers.
This has always been the case throughout the coronavirus crisis, as credit reference agencies have an emergency payment freeze agreement in place.
But taking out a new overdraft or increasing your existing overdraft limit aren't covered by this, which means this information is likely to be passed onto credit reference agencies as usual.
And while a payment holiday won't impact your score, it may harm your chances of getting credit in future.
MoneySavingExpert also found that taking a payment break could stop you from getting a mortgage in the future.
This is because many lenders rely on more than just your credit score when considering whether or not to give you a loan.
Consumer expert at Experian, James Jones, previously told The Sun that one new application alone shouldn't impact your score, but he advises being careful of making multiple applications in a short time frame.
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The latest announcement from the FCA comes after the regulator agreed to suspend plans to cut off credit cards for Brits who are persistently in debt.
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Previously, credit card holders who regularly only made minimum repayments faced having their cards cut off starting in February if they failed to respond to warnings from their lender.
This action has now been pushed back to October at the earliest.