What happens if you can't pay your credit card UK?

The Token Payment Method is divided into eight easy-to-follow steps. We appreciate that this may be new to you, so make sure you read every step carefully and then reread it! This is going to be your new best friend.

Before we jump in, it’s important to explain that all of the information provided is based on section 7.3 of the FCA Handbook. Also, note that the information below applies to unsecured debts regulated by the Consumer Credit Act 1974.

If anything changes, we will let you know as soon as possible. If you’d like to be notified directly of any changes when they happen, you can join our mailing list by clicking here.

Let’s not wait a moment longer and get started with step one...

Before informing your creditors about your financial difficulty, transfer your income to a bank account not associated with your debts. What do we mean by this?

It’s not as complicated as it sounds. In fact, it's a straightforward process. All you need to do is set up a bank account with a bank with which you have no unsecured debts.

No loans, credit cards, store cards, overdrafts. Nothing. This bank account should be brand spanking new. You mustn’t set up or request credit facilities with this new bank. This new bank account is your fresh start.

Once your new bank account is up and running, there’s a little bit of work to be done, such as transferring all activity to your new account. First, ensure all your income is paid into your new bank account. No more income should be paid into the bank account where you have debts.

Next, manually transfer any direct debits, standing orders, or regular payments, such as your mobile phone contract payment, to your new bank account. It will take some time but do not use the “switch bank” service. Use this as an opportunity to make yourself aware of what payments you have going in and coming out.

By taking these steps, you are not just transferring your financial activities but also taking control of your financial life. We want you to feel empowered and in control every step of the way.

When contacting your creditors about your financial difficulties, always KEEP ALL CORRESPONDENCE IN WRITING.

Do not use phone calls to communicate with the creditors. If you can find an email address, great; if not, get your pen out or jump onto your computer and write. You should be able to find the postal addresses of most, if not all, creditors on any letters or statements they have sent you. If not, you will need to search for them on their website.

You may receive letters asking you to call the creditor or system-generated letters. If this happens, look for the sender's address on the letter you receive and resend your original letter to this address. Repeat this process whenever you receive correspondence that doesn’t answer your letter. Don’t panic if you haven’t received a response to your letter; it can take time for your email or letter to reach the correct department.

In step five, we’ll explain what to do if and when you receive a response.

This bit must make sense, so let’s break this down with an example.

Here’s why this is so important:

Section 7.3.5 (3) of the Financial Conduct Authority (FCA) Handbook states the below as an example of treating a customer with forbearance:

Creditors are expected to follow this guidance when a person makes them aware that they are experiencing financial difficulty and are making efforts to put a plan in place to address the situation with the creditor.

Making token payments means the creditor should refrain from pursuing other legal routes, such as court, which could lead to a County Court Judgment (CCJ).

This is why the token payments are so important.

When you do eventually receive a response to your letter, the creditors might ask you to call to discuss your situation. Do not call. Simply write in your letters that you "wish to keep all communication in writing". Doing this will give you a clear record of all discussions and agreements.

At some point, you may receive a letter that includes an income and expenditure form. It is entirely up to you whether you would like to complete this form; however, we suggest you do so your creditor can consider freezing the interest and other charges.

Nothing in Section 7.3 of the FCA Handbook states it is mandatory. The form is simply the creditor’s way of determining how much you can afford to pay them, so be mindful of this.

If you decide to complete the income and expenditure form, you can use our budget planner instead of the one provided by the creditor or debt collector. Please read the following section carefully.

As I mentioned earlier, the income and expenditure form is a crucial tool for the creditor to understand your financial situation and determine a feasible repayment plan. If you choose to complete the income and expenditure form, here are some essential pointers to be aware of:

• Only complete the parts you are comfortable with. If you are unsure about any of the requested information, do not feel pressured to complete that part of the form.
  
• The creditor is looking for the figure remaining after subtracting your expenditure from your income. This is the figure they will expect you to pay.
  
• Creditors cannot suggest amounts for you to make as token payments. Your income and expenditure form shows the creditor how much you can afford to pay each month.
  
• Remember, you are not required to disclose sensitive information such as wage slips, bank statements, or medical records. Your privacy is important and should be respected.
  
• Be aware that luxury expenditures, such as expensive gym memberships, alcohol, cigarettes, etc., may be questioned.

Once you have completed the income and expenditure, retain a copy and post the original to the creditor.

You should eventually receive a letter or email from the creditor confirming that your offer has been accepted for an agreed-upon period. After that, you will be contacted again for a review.

The creditor will get in touch to review your plan at least once within 12 months. However, this will vary; some may review your plan after a month, some after three months, and some after six months. When you receive a letter asking for a review, don't feel pressured to increase your payment if you can't. If your circumstances haven’t improved, you only need to write back to the creditor telling them this. If you can afford to and want to increase your payments, you can do so anytime.

Only pay what you can afford; never sacrifice your mental well-being to increase your debt payments.

Although the Token Payment Method has just eight steps, it contains a lot of information, with do’s and don’ts at every turn. We don’t want the Token Payment Method to be daunting; we want you to feel calm and in control, ready to handle your unsecured debt at a pace you can manage.

You’re bound to have questions! We’ve highlighted some key questions you might have below…

To keep it short and sweet, there is no time limit. If you think that can’t be right, let’s go back to what the Token Payments are all about by visiting the FCA Handbook….

Token Payments are based on what you can afford. It’s as simple as that. If you are still experiencing financial difficulty and you’re paying what you can afford, continue to pay the token payments. There is no time limit on how long a person can experience financial difficulty.

However, as a reminder, creditors and debt collectors will likely contact you about your payment plan at least once every 12 months to see if it is still affordable. You may also find they send you another income and expenditure to complete.

If your circumstances haven’t improved, you only need to let the creditor or debt collector know and state that you want to stay in the current plan.

It's essential to know that your debt can still be sold anytime, even while making token payments. If your debt is sold, please make sure you read our “8 Steps to Handle Debt with a Debt Collector Using the Token Payment Method" guide and consider that you may need to restart this process with them.

This is one of the most significant benefits of the Token Payments Method!

Your assets will not be affected if you follow the Token Payment Method precisely. Creditors and debt collectors must treat a customer (the debtor) with forbearance if a customer provides evidence of financial difficulty, openly communicates and makes token payments.

We believe your unsecured debts should never come to voluntary bankruptcy or enter into agreements that put your assets at severe risk when you are actively making payments as agreed by the creditor in line with the steps we have outlined.

Ultimately, your credit rating will be affected, and the marks will remain on your credit file for six years. However, the impact is much less than that of a Debt Relief Order, Individual Voluntary Arrangement, or Bankruptcy.

If you use the Token Payment Method, you won’t be making the minimum monthly payments, therefore breaching the terms of your agreement.

So, what are the repercussions? The creditor will try to get you to rectify the breach by finding a solution so you can get back on track. They’ll do this by encouraging you to clear any arrears or changing the agreement terms so that you are no longer in breach.

If they have no luck, after a while, they will announce that the agreement has been broken. This is called a default. This means you will be defaulted even if a token payment agreement is in place.

It’s important to note that once the token payment agreement is in place, you can expect nothing worse than a default. Why? Well, the FCA Handbook states that the creditor or debt collector needs to use forbearance, i.e., in this case, not pursue any legal routes they may usually be available to recover the debt. This provides a level of security and limits their actions.

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.