If you have a credit card or store card debt and can only pay back the minimum payment each month, you might be at risk of persistent debt. Read on to find out more about this type of debt and how you can escape it
What is persistent debt?
Persistent debt is the term used to describe what happens when you’ve paid more in interest, charges, and fees than you’ve paid on your original loan balance.
This typically only applies if you have a credit card, store card, or catalogue debt and have only made the minimum payment for at least 18 months.
By law, credit card providers must set a minimum monthly payment, which should cover any interest, fees, charges, as well as at least 1% of the outstanding balance.
While it can be tempting to only pay the minimum payment, especially when you’re looking to spread the cost of large purchases and keep your monthly costs low, over time, this is a much more expensive way to repay your debts. Persistent debt can also affect your credit score, especially if you end up missing payments or find that you can’t make the minimum payment.
When will I receive a persistent debt notice?
Under FCA rules, your credit card company or lender must send you a letter, known as a persistent debt notice, after 18 months.
This alert is sent to make you aware of being in persistent debt, the potential consequences of not acting, and what you can do to escape it. Options might include asking you to increase your monthly repayments or offering a phone call to discuss your debt in more detail.
After 27 months
If you decide not to do anything and remain in persistent debt for another nine months, you’ll receive another notice.
After 36 months
Once another nine months has passed, you’ll receive a third and final persistent debt notice. This is also sometimes called an action letter.
At this point, your credit card provider must offer you an alternative payment solution such as offering an affordable repayment plan, reducing your balance, or waiving interest and charges. They might also suspend your credit card or store card, but this will usually be a last resort.
How can I escape persistent debt?
There are several different ways that you can get out of persistent debt, depending on your individual circumstances and financial situation:
Increase your monthly payment
If you can afford to increase your monthly payment so that it’s always above the set minimum, this will help you escape persistent debt. You don’t necessarily have to commit to paying the same amount each month; making one-off additional payments whenever you can afford them or adding a few extra pounds each month can all help.
When considering how much you can pay back each month, it’s important to calculate how much you can comfortably afford. Making payments that stretch you beyond your means could make the situation even worse. You may also want to stop spending on the card, so that your total debt doesn’t continue to increase.
Revise your budget
Working with a monthly budget that’s based only on the minimum required payment won’t work if you’re looking to get out of persistent debt. You may need to cut back on non-essential spending so that you can increase the amount you put towards paying back your debt. And if you don’t have a budget at all, now’s the time to create one.
Make a list of everything you need to pay each month including your rent or mortgage, utility bills, car insurance, food shop, and petrol to find out how much of your salary you need to put towards your essential costs. Everything left over is disposable income that can be put towards escaping persistent debt.
Move to a balance transfer credit card
Depending on your credit history and current circumstances, you might be able to move your existing credit card debt onto a balance transfer card with a low or 0% interest rate. Keep in mind though that you’ll typically need a good credit score to qualify, and you may need to pay a fee to transfer. If you choose to pursue this option, it’s also important to note that interest free rates are usually only available for a short period of time, so make sure you use this time to repay as much of the debt as possible.
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 solution that works for both parties. Depending on your circumstances and the lender, you might find that they’re willing to suspend your interest and charges for a period of time or transfer your existing debt to a loan with a lower interest rate.
Try the Avalanche method
If you have more than one debt and have been searching for debt repayment methods, you might have already come across the Snowball and Avalanche methods. While Snowball recommends starting with your smallest debt, the Avalanche approach means tackling the debt with the highest interest rate first, which may well be your credit card or store card.
To use the Avalanche method effectively, put all your spare cash towards the debt with the highest APR. Once that balance has been repaid, turn your attention to the next highest, and continue the process until all your debts have been cleared.
Seek debt advice
When you’re struggling to keep up with your monthly debt repayments or can’t find a way to pay any more than your minimum payment, consider seeking expert debt advice. A professional debt advisor can take a holistic approach, looking at all your debts and your overall finances to help find the right debt management solution for you. This might mean adopting an informal approach such as a debt management plan (DMP) or entering a more formal agreement such as an Individual Voluntary Arrangement (IVA).
Looking to escape persistent debt? Our team of experts is here to help. Give us a call on 0161 8260 585 or send a message here