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Payment freezes on credit cards and loans – and the introduction of interest-free overdrafts – were introduced by the Financial Conduct Authority yesterday (3rd April 2020). It’s all part of the bigger picture to help individuals and businesses get through the economic struggles caused by the coronavirus pandemic. But what do these freezes mean, and how do they work?
Here’s everything you need to know about managing your credit card and bank debt during the COVID-19 crisis.
The pandemic has taken a lot out of the economy – and much longer to tackle than the Government perhaps initially expected. So, the initial payment freezes announced in March and early April 2020, originally for three months, are set to be extended.
The continuance of the Job Retention Scheme (furlough) means many of us are left with 80% salaries for the foreseeable future until everyone can go back to work. As such, the largest expense of households – mortgages – have been given an extra reprieve. The original deadline to request a mortgage holiday was in July. Anyone who already has a mortgage holiday has now had their three-month period extended by a further three months. The deadline to first apply for a mortgage holiday is October 31st 2020.
At the time of writing the update (16th June 2020), this was the only OFFICIAL extension to payment freezes. Keep reading to find out more about payment holidays – and remember, it’s always worth paying something instead of nothing, if you can. Even when these official payment freeze periods are over, lenders are expected to act with understanding as the long-term impact of the pandemic is yet to become clear. So, if you’re struggling to pay your bills or debts, get in touch with your lenders to arrange a longer payment holiday if you need it.
A temporary measure is required to help individuals make it through the next few months of the coronavirus crisis without struggling with mounting debt. The Financial Conduct Authority, which regulates banks and lenders, released a statement of expectations on 3rd April 2020.
While most lenders already offered some additional forbearance for their customers due to the pandemic, the FCA wants them to go further. Several banks already said the first £300 of overdrafts should be free, for example – but the FCA wants all overdrafts up to £500 interest-free and charge-free for at least three months.
The FCA wants lenders to follow the new guidelines, including:
Credit cards should also not be suspended during this time, even for those who have requested a freeze or have delayed a repayment. Credit card limits may also be easier to raise at the moment, too.
Payment freezes won’t be offered automatically to everyone. You’ll need to ask for one – and technically may be asked to prove you’re struggling financially due to coronavirus, but it’s unlikely you’ll need to show this. (It creates additional administration for the lender who is already very busy at the moment!).
A payment freeze means you won’t have to make your minimum credit card repayment or monthly loan repayment for the agreed time (at the moment, that’s three months). The banks are still allowed to charge ‘reasonable interest’ on your credit or loan, but you won’t pay this during the frozen months.
It’s designed to give you some breathing space if you’re struggling financially. Many people lost their jobs suddenly or have a reduced income as they’re a furloughed worker. Lenders and banks recognise this means household income may not cover your usual bills and repayments. The freeze means you won’t need to pay those particular repayments in the agreed months.
The first thing to consider is if you really NEED a payment freeze. Yes, money is very tight right now – but do you have enough to make some repayments at least? These payment holidays aren’t free money: banks can still charge interest and that’ll roll up over the frozen months – so you could have a bigger bill than you started with at the end of all this.
Consider making lower repayments to each loan or credit card, rather than freezing everything (or, in fact, anything). Smaller repayments will ensure your interest doesn’t snowball into a huge sum.
If you really can’t afford anything (which many people can’t right now), speak to your bank and credit card providers. They will explain to you their processes for payment holidays, as each lender has a different approach.
Making the call is quite hard – it’s tricky to admit when you’re struggling financially. However, in these upcoming months, lenders will receive thousands of similar calls every day. They’ll be understanding and (hopefully) helpful.
If you’re very deep in debt already, or have taken a significant cut (or suffered a total loss of) income, you can go one step further. Banks are trying not to freeze interest on payment holidays – but they can. If they offered it to everyone, they’d quickly go bust (and we don’t want that!). However, as with any debt management plan arrangement in the past, they CAN agree to freeze interest payments too. You’ll need to show you’re in dire straits – but it does mean you won’t rack up a big interest bill that’ll need paying in a few months’ time.
If you simply miss your payments without contacting your provider first, this could damage your credit score. A mortgage holiday during the official March to October period won’t damage your credit score, but other payment freezes could.
However, you must have the agreement from your bank in writing that a payment freeze has been granted. It’ll also outline – in writing – the charges applied during the freeze, and the dates the freeze applies to. If you don’t have this – and just cancel your direct debits – you’re risking your credit score (and, therefore, your future ability to borrow more if you need it later on).
Banks were already planning to change (or have just changed) their overdraft charges. Many planned to charge up to 40% on the entire overdraft. These changes were supposed to mean most people would actually be better off compared to previous fee structures. It also makes it easier to compare bank accounts when they all have a similar way of charging fees.
However, the FCA wants these changes suspended where possible.
The new guidelines from the FCA is that customers with a pre-agreed existing overdraft arrangement on their main bank account can have the first £500 of their limit free. If you have less than a £500 agreed limit, your whole overdraft is free – but you may not be able to extend it to the £500 limit.
Anything over the £500 will incur charges as normal.
Most high street banks are adding this interest-free rule automatically – but not all of them. Make sure you can use your agreed overdraft without any charges by contacting your bank directly to request the interest-free limit.
Update 16th June 2020: while some payment freezes are extended, and others expected to follow, banks aren’t required to extend this £500 overdraft holiday. So, if you’re currently in your overdraft, do everything you can to get out of it before the end of June 2020 to avoid charges.
All regulated lenders – like high street banks and credit card providers – should follow the FCA guidance.
However, it doesn’t HAVE to apply to some lenders. For example, loans from credit unions or peer-to-peer lending platforms aren’t part of the guidance. They could follow it – but it’s up to them.
You can now also get up to a three-month payment holiday on your car finance plan, thanks to the FCA’s campaigning. You must speak to your finance provider to arrange it, and may need to prove hardship caused by coronavirus.
You’ll get a three-month payment freeze, but interest will accrue during this time. Your car provider isn’t allowed to take your car back if you don’t pay, either.
When you know there’s the option to put off paying a bill to ease your cashflow, it’s easy to take that route. However, the short-term cash gain isn’t worth it if you can avoid it.
Debt easily spirals – especially in situations like sudden redundancy or loss of income, as so many of us have seen in recent weeks. We’ve got lots of financial commitments – usually up to the limit of our monthly income. Without the same income, payments are easily delayed and can pile up.
Payment freezes can make this worse. Yes, really! Unless you’ve got total forbearance from your lender, with an interest rate freeze, you’ll likely end up paying more in a few months’ time than you would if you paid off debts now. Of course, it’s not possible when your income is dramatically reduced – but even paying a small amount towards each debt every month will help stop you slipping into more debt later on.
If you must take payment holidays, look at the interest charges on each first. For example, your mortgage is probably your biggest monthly expense. A payment holiday on that would be great, right? In fact, it could add thousands of pounds in interest to your total mortgage cost. Smaller debts like credit cards cost less in the long-term when on a payment freeze than larger debts like mortgages or car finance.
Debt is now a more common problem than ever. The good news is that there is plenty of help available to help you avoid or get out of debt.
Stepchange offers advice and can help you request payment holidays
National Debtline is another debt charity to help you with a debt management plan
Community Money Advice is a charity that offers advice to communities and individuals
Our Benefits and Debt Assistance section has loads of articles with advice about dealing with debt
Check out our Make Money articles too, to boost your income and reduce your debt.
Remember: you’re not alone, and there is help out there to make sure debt doesn’t take over your life. If you’re struggling with your mental health due to debt, make sure you talk to someone about this, too. Try talking to Mind, the Samaritans, or Saneline to get some help. If you can’t get through on the phones, use the email services instead – someone WILL get back to you.