The average Brit household faces an unsecured debt of half annual pay, which at minimum payments would take 30 years to repay. But a million consumers are in for a big shock this Spring.
I’m writing to highlight that the regulators and bankers are calling in unsecured debt under the guise of doing good – at precisely the wrong time in the economic cycle from the consumers’ perspective. They call it persistent debt regulations. If you search it … all you find are positive comments. I’m not so positive! I don’t have any credit cards for the benefit of full disclosure.
Persistent debt is where, over 18 months, you’ve paid more in interest and charges than you’ve repaid of the amount borrowed. Lenders wrote threatening letters to 2 million cardholders during the pandemic.
Remain in persistent debt for a further 18 months, so for a total of 36 months. Your credit card provider will get in touch again, freeze your card, and set out ways that would enable you to repay your outstanding balance within a reasonable period, which the FCA sees as usually being between three and four years.
Over the last 36 months, bankers wrote to customers at or close to credit card limits.
- They wrote to those making minimum repayments during covid when payment holidays were supposed to be the norm.
- The bankers demanded that these customers increase repayments by 50% to 100% in many cases.
- They froze credit facilities ahead of this Spring Crisis.
- They demanded invasive disclosure of personal financial data to assess circumstances beyond their contractual powers to do so.
These customers are typically low-income, often single-parent households with young families to support during the economic crisis and with little or no savings. They are long-time customers of the banks and have lived this way, from pay cheque to pay cheque, using their cards within the agreed terms for years. It is used as a facility or float to dip into when there is more month than money. For example, at Christmas to treat the kids. Or for a much-needed holiday break. These customers are not in default on the cards; they often have always made payments on time. They have good credit scores. These customers have been loyal cardholders for 20 to 30 years in many cases.
To date, these customers have been faithful, trustworthy, satisfied, and strong advocates of their banks. Due to the high-interest rates on the cards, they have proved very profitable for bankers over the years. The banks have attracted borrowers with click-bait rates and made repeated unprompted increases to lending limits. Banks have remained satisfied with repayments from debt-ridden borrowers for years, even though the borrowers themselves suffer from inefficiency due to debt overhang. Win-win, you would have thought.
So, what is going on? Are the bankers raising capital to shore up their balance sheets – at the worst time in economic history from the consumers’ perspective? Is it to satisfy the regulator? Or the taxman, who doesn’t want to have to bail out bankers anymore? Perhaps the Government seeks to offload banks from their balance sheet? What’s this mass cross-subsidy from borrowers to lenders about?
Due to bank failures and bailouts, we have just had ten years of austerity—two years of covid pandemic hitting low-income households with 7 in 10 homes financially worse off. And now customers face a Spring Crisis due to high inflation, fuel problems, tax hikes, and geopolitical unrest.
Ten years ago, bankers turned their marketing budgets away from savings (due to low interest rates) and investments (the retail distribution review). They filled their boots with high-margin unsecured loans to satisfy shareholders and pay banker bonuses.
Why call debts in now?
People aren’t stupid. They know bankers charge exorbitant rates of interest on their credit card balances. They know that items bought on credit are paid for three times over. They voluntarily will reduce debit balances when they can afford to do so – when they do not face difficult choices of eating versus heating. They remain within the lending terms originally signed up to when the bank sold the product.
Even when borrowers make large one-off payments to reduce debt balances by half, the banks still send the letters and freeze the cards, removing lending facilities. Because the computer says, it is the monthly repayment amount that must increase.
Initial estimates were that around 2 million accounts could reach the 36-month stage. However, we can now see from industry data that this has reduced to about 950 thousand customers (who have 1.1 million accounts), or just over 2 percent of all credit card accounts.
That’s 1 million customers increasing their repayments, throughout the pandemic, in response to the earlier communications within the persistent debt process.
We are leaving 1 million unable to do so.
People aren’t stupid.
Why vary the terms now? And don’t tell me because the regulator told banks to!
Regulators say, “consistently making low payments for a long time is an expensive way to carry longer-term borrowing, and these rules have been created to keep your overall costs down.”
The regulator adds.
“If having the use of your credit card suspended will cause you significant difficulties with your wider financial situation, it’s vital that you engage with your card provider to explain this, so that they can take this into account and consider whether this action remains necessary based on your updated circumstances.”
“If you are worried about meeting your everyday bills, you may want to consider seeking free debt advice.”
With a final kick in the teeth.
“Your credit report will continue to reflect whether you have met your contractual minimum monthly payments, but it’s important to consider that only making minimum or low payments over a long period can influence your credit rating.”
This process is happening because it is Government policy, as a debt-ridden nation threatens a persistent recession, which loses votes. Debt reduction after a financial crisis can work as a macroeconomic policy that restores economic growth. Debt-ridden borrowers from excessive debt can improve their efficiency, thus helping aggregate productivity in the overall economy.
I say these 1 million people need some breathing space.
We face a future of increasing global economic and geopolitical uncertainty and employment insecurity. More so now than ever. Events like this Spring are more likely to become the norm in the future. Times like these are not times for promoting debt restructuring or wealth redistribution from borrowers to lenders.
My advice to the 2 million affected by this cruel regulation is this. Make a note to rid yourself of credit cards in the future, as these times will pass. Maintain your contractual obligations on the cards, but always pay yourself first. Get yourself financially organised as best you can. Seek help where you can.
And here’s a tip the sellers of loan products or saving products, the providers, or the other unaccountable hierarchies of profit and power fail to tell you.
Whether you are an asset or a liability on their books, the banks, related companies, and their distributors are tapping into you for fees to pay shareholder profits and bonuses. They are not in the business of helping you make money in the first place.
My tip to you is to make more money during these challenging times to navigate the cash flow valley. Turn hobbies into a portfolio of side hustles, help one another, and create a better future for you and your loved ones.
Put yourself first. Don’t feel guilty. See the bankers for what they truly are. Highway robbers!
Academy of Life Planning 