What is persistent debt?
Persistent debt describes what happens when you’ve paid more in interest, charges, and fees than you’ve paid on your original loan balance. This situation typically arises when you have catalogue, store, or credit card debt and you’ve made only the minimum payment for the last 18 months. Persistent debt rules do not apply to personal loans or overdrafts.
The law requires credit card providers to set a minimum monthly payment. This amount must cover the interest and any charges. It must also include at least 1% of the outstanding amount. The exact minimum is decided by your provider, but it must follow these FCA guidelines.
It may be tempting to pay the minimum amount, especially when you want to spread the cost of a large purchase and keep your monthly costs low, but it is a much more expensive way to repay your debts.
Persistent debt itself doesn’t automatically lower your credit score, but paying only the minimum each month can keep your credit utilisation high, which may reduce your score over time. Missing or late payments will almost always damage your credit rating.
When will I receive a persistent debt notice?
Under Financial Conduct Authority (FCA) rules, your credit card, store card, or catalogue provider must contact you after 18 months if your account is in persistent debt.
The objective of the communication is to draw your attention to your persistent debt status. It should also inform you of the consequences of inaction and tell you how to escape the situation. Options could include a request to increase your monthly debt payments or providing contact details to discuss a debt solution.
After 27 months
If you choose to do nothing and continue in your persistent debt position for an additional nine months, you’ll receive another communication reminding you of your situation and encouraging action.
After 36 months
A third and final persistent debt communication will follow after another nine months have passed. This notice is sometimes called an “action letter.”
At this stage, your provider must work with you to agree a realistic repayment plan to help you clear your balance in a reasonable period. This may include freezing or reducing interest and charges.
They might also suspend your credit card or store card, but this is usually a last resort.
How can I escape persistent debt?
Your escape from persistent debt depends on your circumstances and current financial position.
Increase your monthly payment
If you can afford it, the easiest way out is to increase your monthly payment so it stays above the minimum. You don’t have to commit to paying the same amount each month. Making a one-off additional payment when you can afford to, or adding a few extra pounds each month, will all help reduce the loan amount and the interest.
Carefully calculate how much you can afford for debt payments each month. Paying more than you can afford could stretch your budget and worsen the situation. You should also stop spending on the card to prevent your total debt from increasing.
Revise your budget
Working with a monthly budget based solely on the minimum required payment isn’t a persistent debt solution. You need to cut back on non-essential spending to find the funds to increase your debt payments. If you don’t have a budget, now’s the time to create one.
Make a list of everything you need to pay each month. These costs should include your rent or mortgage, utility bills, car insurance, food, and petrol. This information will help you to assess how much of your salary you need to cover essential costs. Everything remaining is disposable income that you can use to escape your persistent debt.
Move to a balance transfer credit card
If you have a good credit score and current circumstances allow it, you may be able to move your existing credit card debt onto a balance transfer card with a low or 0% interest rate. You may pay a fee to transfer, but the interest savings could make this move worthwhile.
Balance transfer cards typically offer 0% interest for a fixed period, usually between 12 and 24 months, depending on your provider and credit score. Use this time to pay off as much of your balance as possible before the interest rate rises.
Contact your lender
While you might be concerned about contacting your credit card provider or lender, calling them and explaining the situation could help you find a debt solution that works for both parties.
Your lender may be willing to suspend interest and charges temporarily, or transfer your existing debt to a lower-interest product, depending on your situation.
Try the Avalanche method
If you have more than one debt and have searched for debt payment methods, you might have encountered the Snowball and Avalanche methods of debt repayment. While Snowball recommends starting with your smallest debt, the Avalanche approach means tackling the debt with the highest interest rate first. Credit and store cards are often the biggest generators of interest debt.
Seek debt advice
Put all your spare cash towards the debt with the highest Annual Percentage Rate (APR) to apply the Avalanche method. Once that balance has been repaid, turn your attention to the next highest, and continue the process until all your debts have been cleared.
Consider seeking expert debt advice if you’re struggling to keep up with your monthly debt payments or if you can’t find a way to pay more than your minimum payment. A professional debt advisor will take a holistic approach to your debts and overall finances, helping you find the right debt management plan.
This could mean taking an informal approach, like a debt management plan (DMP), or entering a more formal agreement, such as an Individual Voluntary Arrangement (IVA).
Free, impartial debt advice is also available from charities such as StepChange, National Debtline, and Citizens Advice.
