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CREDIT CRUNCH

Struggling credit card borrowers offered lower repayments and more time to pay off interest-free overdrafts

CREDIT card borrowers will be offered lower repayments if they’re still struggling financially when three-month payment freezes come to an end.

Firms will also have to give customers hit by coronavirus longer to pay off £500 interest-free overdrafts.

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Credit card lenders will have to offer help to customers still struggling when payment holidays come to an end
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Credit card lenders will have to offer help to customers still struggling when payment holidays come to an endCredit: Getty - Contributor

The help is being offered from July 3 under new guidance confirmed by the financial regulator today, after it was first mooted last month.

Lenders have already been offering payment holidays for an initial three-month period to struggling borrowers.

But with this three months now coming to an end, firms have been told to contact customers to find out if they can make repayments after their payment holiday and to agree a repayment plan if possible.

If they're still struggling and can't meet a repayment plan, more help should be offered.

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.”

But the Financial Conduct Authority (FCA) has stopped short of extending a temporary ban on lenders hiking overdraft fees to up to 40 per cent.

New rules that allow overdraft charges to be hiked came into play from April 6 but banks were told by the regulator not to up rates then if it meant borrowers would be in a worse position.

But the FCA says lenders can now revert back to these new interest rates - something MoneySavingExpert.com founder Martin Lewis warned about just last week.

Trade body UK Finance said last month that 1.2million people had been given a payment holiday on their credit cards and loans.

What help is being offered?

Here's what the FCA expects lenders to do following a three-month payment freeze where borrowers still can't meet repayments:

  • Offer reduced credit card or personal loan repayments or a complete deferral of repayments for an additional three months
  • For customers who've yet to apply for a payment freeze, the deadline will be extended until 31 October, 2020
  • Offer lower interest rates on borrowing above interest-free buffers on overdrafts
  • Customers who already have an arranged interest-free overdraft can request up to £500 interest-free for a further three months
  • 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.

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.

The new guidance applies to credit cards, store cards and catalogue credit, personal loans, and overdrafts.

It doesn't, however, 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: “For those who are now in a position to restart payments, it will be in their best interests to do so.

"But for those who still need it, the package we are confirming today ensures there is help and further support.”

Will credit scores be hit?

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 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.

It's worth pointing out that taking out a new overdraft or increasing your existing overdraft limit aren't covered by these rules, which means this information is likely to be passed onto credit reference agencies as usual and could impact your score.

An overdraft repayment plan or refinancing to a loan to pay off an overdraft is also likely to be reported to a credit reference agency.

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.

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.

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.

Martin Lewis warns 40% overdraft charges come in soon - here's how to cut debts now
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