Financial Education Key to Breaking Debt Cycles
The Financial Conduct Authority has today proposed a new set of rules designed to help customers who are in persistent credit card debt, just a few days after a House of Lords committee lambasted the regulator and the banks for not doing enough to help people suffering under a cycle of debt and high interest charges.
The FCA defines persistent debt as the dreadful situation in which someone never gets to grips with paying off their loan, because all their money is spent on paying the interest charged on the loan, so the underlying debt remains the same.
This nightmare is visited on around 3.3 million people in the UK and the FCA’s proposals could offer them a chance of relief. The suggestion is that in certain circumstances interest charges may be either waived or suspended to allow customers to tackle their debt problems, but the fundamental problem is that these customers, paying high rates of interest and suffering other charges, are the most profitable customers for the credit card companies, and it is credit card debt that is the most common form of persistent debt.
When we work with school students through delivering Keep the Cash, we spend a significant amount of time making sure that they all have a practical grasp of the real meaning and effects of the concept of interest.
It is one of the real lightbulb moments of the entire Keep the Cash experience when students comprehend that there are two entirely separate sources of debt associated with any commercial loan.
First, there is the debt itself – often called the capital debt – and then there is the separate cost of the interest charged on that debt. Students quickly come to the awful realisation that if they make no inroads on paying off the capital, and just faithfully pay the interest, that the underlying debt will remain a burden on them for ever and a day.
We will never successfully tackle the scourge of persistent debt and all the degrading social problems it causes (including family break down and mental illness) until we have a planned programme of education for every child, in every school in the country.
Getting to that great destination is the purpose of Keep the Cash.