Getting caught in persistent debt is a possibility when borrowing money that people often warn against. But what does persistent debt mean?
In this article, we are looking at the most frequently asked questions about persistent debt and how to navigate it from the definition to whether it affects your credit score. Keep reading to find out more.
‘Persistent debt’ is a term used to describe when a borrower makes minimum payments for a while. By the Financial Conduct Authority (FCA) rules, your lender must tell you if you are deemed to be in persistent debt.
This term can be applied to:
Your lender might ask you to make higher payments if you are in persistent debt. However, they will never make you pay more than you can afford. Rather, they are following the FCA rules that are designed to protect you from problem debt.
For example, when a borrower is in persistent debt, a lender must inform the borrower of other repayment options, explain what happens if the borrower continues making minimum payments, and suggest paying more (if the borrower can afford it).
Many borrowers are in fear of having their credit card suspended. And if you remain in persistent debt, this is a definite possibility.
However, you will not have your credit card suspended straightaway. This only happens as a last resort and if you have been paying more towards interest and charges than towards the amount you have borrowed for 36 months or longer.
Credit card companies will try to help you and are only likely to suspend your account if you don’t attempt to make higher payments or if you outright ignore them. Suspending your card is a last resort measure that is only done to stop the balance, and therefore your debt, from growing larger.
Your credit score may be affected if you miss payments or can’t afford to pay the minimum payments on your credit card or loan.
A lower credit score makes opening new accounts or borrowing more money harder. So, staying on top of your payments where possible is important.
Read the beginner’s guide to credit scores now to learn more.
For most forms of overdue debt to remain enforceable, your creditor must take action against you within a specific timeframe, otherwise known as a limitation period. ‘Taking action’ refers to starting court proceedings against you, which the lender can do if your debt remains overdue and you do not show signs of serious effort to address your arrears.
In most cases, the limitation period timeframe is six years since you last acknowledged your debt, which is normally when you last made a payment or wrote to the creditor. Mortgages, however, are an exception and have a longer time limit. Your lender has six years for interest and twelve years to recover the principal amount that was borrowed.
It is important to add that even if your lender does not take court action against you during the relevant time period, your debt will still continue to exist, but the lender will no longer be able to enforce it.
Being in persistent debt creates risks for your financial wellbeing, but it does not have to be a permanent state of your finances. You can get out of debt by paying more towards your credit card balances or making a debt repayment plan if you need additional support.
Here are some ideas to consider:
You can also work with a debt charity, like Step Change, to access free and impartial support and debt advice.
How would I benefit from a credit line?
Alternatives to bad credit loans
Learn more about personal finances and creating healthy money habits on the Polar Credit Info Hub.