What is persistent debt and how to get out of it

Have you recently received a letter saying you are in persistent debt? Don't be alarmed just yet.

The letter is not necessarily implying that you are in financial difficulty and that the money you owe is spiralling out of control. It's simply saying that the cost of your borrowing has got to a point where you may remain in debt for a long time. The letter, as we’ll explain, is designed to help you move out of this situation. 

What is persistent debt?

Persistent debt is when someone ends up paying more in interest, fees and charges than the original amount they borrowed. The Financial Conduct Authority (FCA) brought in legislation in March 2018 to make credit card providers more responsible in helping customers move out of debt. It’s since been extended to store cards as well.

The regulations state that if a customer falls under this category for 18 months, then the lender must contact them to let them know. They will suggest ways to get out of it, including paying more money. 

You don’t necessarily need to contact your bank or credit card provider straight away, but it is a good idea to do so once you’ve considered how you are going to react to the letter. If you don’t progress from this situation with or without their help, you’ll then be sent a reminder nine months later when they may be clearer on the action they’ll take. 

If you are still in persistent debt after 36 months then your bank or credit card provider will take action. This can include suspending your card, freezing or reducing your interest. As we’ll mention later on, it’s crucial that you contact your provider by this point if you cannot get out of persistent debt yourself. As the regulations came into play almost two years ago, this part of the process will have now started for many customers.

How do I get into persistent debt? 

The most common way is by simply paying the minimum amount on your credit card each month. If this happens over 18 months, the interest will mount up and it can take many years to clear a credit card balance paying only this figure. 

Even if you’ve paid more than the minimum payments during the past 18 months, you could still be classed as being in persistent debt. This could be because if you’ve had the debt for a long time you may not have paid enough to cancel out the accumulated interest. So this will log with your lender as persistent debt under the FCA definition. 

How do I get out of persistent debt? 

1 - Increase the amount you pay 

The persistent debt letter you are sent will ask you if you can afford to increase your payments, so if you can, you should do so. Increasing the amount of debt you pay off will decrease the amount you owe. As a consequence, you will be charged less interest. If you can do this easily you do not need to contact your provider, although it might be a good idea to check with them you’re paying enough to no longer be in persistent debt. 

This will be the easiest solution for the vast majority of customers, particularly those who are paying the minimum amount each month. If you can increase your monthly payments and stop spending on the card, you’ll cut the debt down. Our guide to paying off large credit card debt outlines ways in which you can do this. 

2 - Look for cheaper lending 

If you can’t afford to pay more, you should look for a lower interest solution with a different provider. One of the easiest ways to pay less interest is via balance transfer cards. Many credit card companies offer introductory offers of 0% interest on all balance transfers. This can last up to 26 months. 

You will be restricted to transferring up to around 90% of your agreed credit limit and possibly charged a fee (usually around 3% of the balance). Check how much of the balance you can pay off within the length of the introductory offer as well. Anything you can’t clear by the end you will then be charged interest on. 

The credit limit you are offered and your chance of acceptance will depend on your credit history and the lender’s individual criteria. For this reason, it’s always advisable to use soft search facilities before applying (so as not to damage your credit score). If you use a credit score checking service like our member-only platform, CredAbility, you will be updated on eligible offers as your score develops over time. 

Even if you can only match your current minimum payment this will make your debt reduce quicker as it will go on the debt, and not on any interest. If it’s an interest-free card even the minimum payment will not be persistent debt, as your interest will no longer outweigh the money you owe. 

You could also consider a debt consolidation loan. This will mean each month you pay a set amount off before eventually clearing your debt by an agreed deadline. If you have numerous debts this may be a good option, as you can collate them all together and pay off by a set time. 

Unlike credit cards with 0% interest introductory offers, you will obviously be charged interest on a debt consolidation loan. Again the amount depends on your credit history and lender’s individual requirements. Again using soft search facilities is advisable, so that you can learn your eligibility for loans that will save you money before applying. 

What if this isn’t my only debt? 

This is where things can get slightly more complicated. If you’ve got a number of debts, you may be focusing on one of them. People tend to do this by paying off the highest interest debt first (known as the avalanche method) to save money on interest payments. Or they focus on the smallest one first (the snowball), so as to reduce the number of debts they have and stay motivated to pay off all of them. 

Say you’ve got four debts, a couple of credit cards, an overdraft and a loan. It could be that you will continue to pay only the minimum amount on the credit cards whilst paying off the overdraft and/or loan. This will mean you’re in persistent debt in the eyes of your credit card providers. But you’re doing the best thing overall to get out of debt. 

If this is the case contact your bank or provider and let them know as soon as they send you the persistent debt letter. If they are aware that you will be in this situation after 36 months they should be able to provide you with a solution, or at least not suspend your card. Don’t be tempted to use higher interest loaning to pay off your credit card just to avoid persistent debt. This will be more expensive for you and could place you in financial difficulty. 

What if I’m finding it hard to increase the amount I pay off and can’t find alternatives? 

Persistent debt letters are a gentle reminder for many people to sort their finances out. But for some, it’s a warning of the situation becoming more serious. If you are struggling to repay your debts every month and your eligibility for credit is poor, it might be time to look at the matter more seriously. 

This is one of the reasons persistent debt letters are helpful. Unlike CCJ or default action they don’t impact your credit score. If they enable you to look at your finances in a franker fashion you can start moving out of debt before anything more serious comes about. 

The first thing to do is to contact your provider. As they’ve pointed this out to you, they will be more accommodating in finding solutions. If you cannot afford to pay more of the debt they may consider freezing interest payments on a temporary basis. 

There’s always external assistance that can help you, with charities such as Stepchange and Citizen’s Advice who offer free and impartial advice. They may be able to help start you off on a debt management plan (DMP) which could help you settle what you owe in a quicker fashion. 

Although a DMP itself won’t be recorded on your credit report, action taken from it may be (such as reduced payments). This will have an impact on your credit score, so look at it as a last resort. 

Want to improve your credit score? Follow our 12-week plan to a better credit score.