Reality bites for bill payers as Covid help starts rolling back

Payments demands kick back in as the pandemic recession makes its presence felt

People could be left paying 40% interest on coronavirus debts (Getty)

For a moment there was a pause. A suspension of reality, a chance for those financially hit by the last few extraordinary months to step out of the hamster wheel and ask for help from those we owed money to.

Those creditors were, almost without exception, extraordinarily accommodating, backed as they were by emergency funding measures, legislation and the all-seeing threat of a public relations catastrophe.

If you needed a break from your mortgage, loans, credit cards, regular payments or even if you needed another loan, the chances are you could have one – quickly, easily and without the usual self-flagellation.

You wouldn’t be chased or hounded for outstanding bills, there would be no loud and insistent knock on the door, you could take stock and regroup without fear.

Today marks three months since the beginning of lockdown, though, and that brief hiatus is winding down. If consumers aren’t quick to rev back up to speed on bills, financial responsibilities and life in general, they’ll be in trouble.

Reality bites

The Covid crisis has done strange things to our financial affairs.

An unexpectedly large number of people have watched their outgoings plummet while their incomes remained at or near normal. They’ve been able to set aside cash at extraordinary speed and scale.

Others have been blind-sided so badly that they’ve struggled to feed their families.

Overall, one in three of us has already been left worse off as a result of Covid-19, according to research by Credit Karma, even before the protections begin to recede, leaving us exposed to the full force of the downturn.

As the massive government cash-injecting and other schemes continue, two in five of us believe our incomes are less secure now than they were as lockdown began.

Overall, UK consumers think the cost of Covid on their personal bottom line to date will already take 18 months to unravel.

Some economic forecasts suggest the downturn that is only now making its presence felt will be with us until next Christmas – even without the secondary risks of a no-deal Brexit at the end of this year. Warnings abound of mass redundancies for the 8 million people watching their period of furlough swiftly close.

If you were looking for a conclusive change in a once charitable collective attitude, look no further than the latest announcement from Ofgem that energy providers can now begin to pursue debt repayments again – if non-aggressively.

“We recognise that suppliers cannot extend unlimited credit to customers – nor is this in customers’ interests overall,” said Ofgem chief executive Jonathan Brearley in a letter to suppliers on Monday, which is an interesting statement on give and take in the energy industry at a time when wholesale energy prices have tumbled and, once again, those savings are not being passed on to customers.

A little more time

But we’re not back to business as normal quite yet. Bailiffs won’t be able to restart their doorstep actions over arrears for bills like parking fines or taxes for another two months, for example.

Above all, the Financial Conduct Authority (FCA) confirmed earlier this month that those currently taking mortgage payment holidays or applying for one could extend it for a further three months until the end of October, though bank bosses have called for new payment holidays to now appear on credit reports and have an impact on personal credit ratings.

Repossessions have also been banned until Halloween, the same deadline that has now been set to apply for payment holidays on credit cards, loans and overdrafts.

But after massive initial uptake, including by those who didn’t need them, the extension will only be available under certain circumstances as part of new plans designed to wean us off our time away from repayments.

The regulator’s proposals mean that towards the end of a three-month payment holiday, banks will contact customers about loans and credit cards and check whether they can afford repayments.

If they can afford it they’ll need to start repayments, if not they can make minimum payments at a level they can afford for three months. If they can’t afford that, they should offer another three-month payment holiday. If you don’t respond when the bank tries to get in touch, you’ll be treated as if you can resume repayments.

Where people need it, they can ask for another three months with an interest-free £500 overdraft. Banks that have provided this to all customers automatically can begin to only provide it to people when they ask, and overdraft firms can investigate whether people are eligible for help – as long as it doesn’t cause delays.

Additional borrowing holidays can’t be offered when it would make people worse off, such as no improvement in their circumstances after three months, but overdraft customers should be given an opportunity to request extra help and those receiving it can’t have their credit cards suspended.

Finally, despite the industry’s grumblings, the FCA has confirmed that anyone getting help will not have their credit record affected – although banks can use other information to decide whether or not to lend, so it could still affect your ability to borrow in future.

The hangover

Before the changes kick in, it’s essential to take stock. You’ll be liable for the extra interest accrued over the additional payment holiday, and taking one could make it harder to borrow in future.

“Anyone who snapped up a three-month break from repayments for credit cards, store cards, personal loans or overdrafts as soon as possible is rapidly running out of time,” says Sarah Coles, personal finance analyst for Hargreaves Lansdown.

“The FCA has proposed plans that will let some people stretch their holiday for longer but it’ll be harder to qualify and, even if you do, the banks can refuse if they think the break could do you more harm than good.”

“These loans and cards can come with hefty interest rates, so putting off repayments will build up the interest you’ll eventually have to pay, creating an even bigger debt mountain to climb when you’re back on your feet,” adds Coles.

“There’s also the risk you’re not going to get back to financial fitness within three months – so you won’t be in any position to do any climbing at all.”

But there’s no doubt these proposals deliver a real kick in the teeth for borrowers. Banks will be able to ramp up overdraft charges to the sky-high levels they were planning before this all kicked off.

“Suddenly consumers could be left paying around 40 per cent interest on your coronavirus debts,” says Coles. “This feels like an awful time to be dropping this kind of burden on people.”