* Analysts say watchdog has thrown a lifeline
* Credit cards ultimately could reduce deals on offer
* First batch of credit card suspensions could be this month (Adds detail)
By Huw Jones
LONDON, Feb 3 (Reuters) - British lenders will only be able suspend credit cards if they can prove they have exhausted other options to help customers stuck in debt, Britain's financial watchdog said on Monday.
Under rules introduced in March 2018, the Financial Conduct Authority (FCA) forced credit card companies to help persistently indebted customers repay what they owe and save up to 1.3 billion pounds ($1.70 billion) annually through lower interest charges.
The banks and other lenders had to identify and write to customers in difficulty. If the debt continued for 36 months, they had to act and ultimately could suspend credit cards, with a first batch of suspensions possible this month.
The FCA said it was concerned some firms were planning a blanket suspension of cards for all customers in the persistent debt category. That could drive them to desperate measures, such as resorting to loan sharks.
"When they (firms) choose to suspend or cancel a customer's access to credit, they must serve customers with a notice giving reasons for this, and those reasons must be objectively justified," the FCA said in a letter on Monday to credit card firms.
"Where we identify poor practice, we will take swift action to ensure customers are being treated fairly and our rules are being followed."
Customers may not be aware they could be entitled to measures such as reduction, waiving or cancellation of interest and charges.
Persistent debt is defined as paying more in interest, fees and charges over 18 months than the principal on the card.
The rules target some 1.6 million customers who are making minimum payments and urge them to follow a repayment plan for 3-4 years. They are a small portion of Britain's 30 million credit card-holders.
StepChange, a charity that helps people in debt, said between one and two million people will shortly receive letters about their debt under the FCA deadline.
"The FCA is unequivocal that firms should not cancel people's cards wholesale," said Peter Tutton, head of policy at StepChange. He welcomed the FCA's telling firms to include in their letters a reminder that options are available if people cannot afford suggested payments.
Rachel Springall, an analyst at Moneyfacts.co.uk, said the FCA could have thrown struggling borrowers a lifeline.
"There may well be borrowers out there who are keeping up with the minimum repayments but are unable to pay more each month, and these borrowers need support," she said.
But she said there was a risk credit card firms could reduce the range of deals on offer if they lose income from interest fees.
UK Finance, which represents banks, said it was important customers do not ignore letters from their card provider.
$1 = 0.7631 pounds Reporting by Huw Jones; editing by Barbara Lewis