You may have heard about the phrase “persistent debt” in the media recently – and with good reason. This is because the FCA (Financial Conduct Authority) has recently issued a warning to lenders against a blanket suspension of credit cards to people who are classed as in persistent debt.
Persistent debt is the term given to those who have paid more in charges and interest than the actual balance owed on their credit card or loan. Thousands of people in the UK currently fall into this category.
In February 2020, the FCA announced that under new rules, lenders must do everything they can to help customers to reduce the level of debt they currently have on credit cards. If customers cannot afford their lender’s proposals to reduce debt, the lender must offer forbearance. This could include the reduction, waiving or cancellation of fees, interest and late payment charges – at the cost of having a credit card outright cancelled.
What Does This Mean for Those in Persistent Debt?
Some people classed as in persistent debt are worried that the inability to pay off the remaining balance owed could result in them having their credit card rejected. However, the FCA has told credit card companies that they must exhaust all avenues before finally cancelling credit cards.
While this may be of some relief to those currently in the credit card debt trap, it still means that the possibility of having a credit card cancelled exists. While other forms of lending (such as payday loans or emergency loans) will still be available to those in this situation, now may be a good time for those in persistent debt to consider how they can improve their circumstances. Here’s how:
Consider Taking Out a Payday Loan
In some circumstances, it could be beneficial to take out a payday loan or emergency loan to pay back some of the balance on your credit card. This could be useful in the sense that it will reduce the amount of interest you currently owe the provider of your credit card. It could also help you avoid charges for non-payment while demonstrating to your credit card provider that you’re making an effort to repay the balance.
However, it’s worth weighing up the pros and cons. If the interest on your payday loan is greater than the monthly interest on your credit card, you could end up spiralling further into the debt trap.
FCA rules state that payday lenders cannot charge any more than £24 in interest per £100 borrowed. In some circumstances, this can be beneficial (for example, if you have accidentally overdrawn and want to avoid unauthorised overdraft bank charges), as the £24 in interest is less than most high street banks would charge you for being overdrawn for a month.
You should only take out an emergency payday loan if you are certain that you can meet the repayments on time and in full. While payday loans from direct lenders in the UK are useful for providing a little breathing space during financial emergencies, it is important that you do not become reliant on them.
Be Conscious of Where Your Money Is Going
It’s important to work out what you’re spending your money on each month. By doing so, you’ll be able to identify areas where you can save money.
Many people in persistent debt are surprised to find out where they can save reasonable amounts of money every month. So, for example, if you’re the sort of person who enjoys a coffee from a high street chain every morning, perhaps it’s time to start making your own. Likewise, if you’re a fan of fast food during your lunch break, it might be a good idea to start preparing meals at home. This could save you almost £2,000 per year alone!
Now might also be a good time to think about what’s essential in your life. For example, can you do without binge-watching the latest drama on Netflix? Do you really need that subscription to Spotify when you could listen to the same music via its free, ad-based service instead? These are all ways you could save money that could help you get out of the persistent debt classification.
Make One-off, Ad-hoc Payments When You Can
Now and then, you might find yourself with more money at the end of the month than usual. For example, many have been surprised to find that they had more expendable income during the Covid-19 lockdown because cinemas, cafes, bars, and restaurants were temporarily shut.
As tempting as it may be to keep this excess cash for a splurge when the time comes, it may be smarter to pay off any payday loans or credit card debt you currently have. This will help to improve your credit rating and could potentially allow you to access larger, more affordable lines of credit in the future.
Seek Advice From a Professional
If you’re currently classed as in persistent debt, you may be overwhelmed by the number of letters you receive from credit card companies, payday loan providers and banks asking you to increase your minimum payments.
If this sounds familiar, it’s important not to get too stressed out. While we all worry about money, the good news is that there is professional help available for those who feel like they cannot deal with their current financial circumstances.
It might be the case that you qualify for a debt solution like a Debt Management Plan, which allows you to manage your debts by making one single monthly payment that gets split between each of your creditors.
While it’s not always beneficial to take out a payday loan to service another debt, these alternative forms of finance could help take you out of the persistent debt category in certain circumstances.
If you feel like a payday loan could be the solution to your temporary financial problems, why not use our free service to help match you with a lender? We work with the best payday loan direct lenders in the industry – all of which are FCA regulated. This means that you can expect fairness, transparency and affordable finance from one easy-to-use website.