Slowdown showdown for credit cards?
The current economic slowdown that is battering the financial world is a little different from previous 'market readjustments'. This time it's not just big business and the banking industry that have felt the shock-waves - the crunch has hit consumers much earlier than before. This is partly due to the amount of personal debt that individuals have built up during the good times, when credit was easy to obtain and the banks were willing to lend to everyone who came knocking at their door. A survey by Moneyfacts, the financial information analysts, found that at least 10% of credit cards have raised their interest rates or imposed fees as a direct result of the financial storm now sweeping across UK PLC.
The average interest rate on credit cards has risen from 16.8% to 17.2% in three months. This raise is in direct opposition to the Bank of England's base rate cut of 1.5%, bringing the base rate down to 3% in an attempt to boost the ground level economy and stave off inflation. As lenders realise that the financial pot is nearly empty, they're manoeuvring their positions to ride out the storm as best they can. Their concern is that the early impact the crunch has had on consumers means a greater risk of customers defaulting on payments. The interest rate rise on credit cards is seen as a preventative measure against any increased exposure to bad debt by the lenders.
As the dominoes started to fall in the banking industry, lenders lost faith with their former partners and in their customers' ability to pay back loans and credit card debts. The system relies on continuous injections of consumer cash in the form of interest payments to keep working. As borrowing from other financial institutions has become much harder, the only way for lenders to raise capital is to increase the interest charges on credit cards, loans, credit agreements and mortgages. This ground-shift signifies an end to the 'live now, pay later' mentality of the 1980's and 1990's. The good times really could be over - for a short time, anyway. But by readjusting their positions, the lenders may actually be doing the right thing, and not giving in to 'quick fix' solutions like rate cuts. A more pragmatic approach to the system means that credit cards still offer great deals - they're just a little more careful to avoid lending to customers that may already have problems.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The credit card industry has been hit twice. The loss of the overall market share several years before resulted in a clamour for customers, with 0% balance transfers acting as financial carrots to customers wanting to reduce their interest payments on outstanding balances. Cards are now shifting towards a policy of charging up to 3% balance transfer fees to try to pull back some of the lost profit that the 0% offers cost them. The second blow was the Office of Fair Trading's decision in 2006 to cap penalty charges to 12. Now cards are lining up for another bureaucratic blow as the Complaint's Commission takes a closer look at the personal protection insurance schemes that often accompany credit card deals.
Unemployment is the next potential credit problem as the economic downturn starts to impact on jobs over the next 12 months. If things do get worse credit card customers can expect interest rates on their cards to go up not down, as lenders try to cushion themselves against the impact bad debt exposure could have on their business. There are still plenty of good credit card deals available. But lenders are a little more careful about whom they lend to, so the best thing to do to ensure that the credit crunch doesn't scupper your chances of getting a good deal is to check your credit rating measures up before you apply.
The average interest rate on credit cards has risen from 16.8% to 17.2% in three months. This raise is in direct opposition to the Bank of England's base rate cut of 1.5%, bringing the base rate down to 3% in an attempt to boost the ground level economy and stave off inflation. As lenders realise that the financial pot is nearly empty, they're manoeuvring their positions to ride out the storm as best they can. Their concern is that the early impact the crunch has had on consumers means a greater risk of customers defaulting on payments. The interest rate rise on credit cards is seen as a preventative measure against any increased exposure to bad debt by the lenders.
As the dominoes started to fall in the banking industry, lenders lost faith with their former partners and in their customers' ability to pay back loans and credit card debts. The system relies on continuous injections of consumer cash in the form of interest payments to keep working. As borrowing from other financial institutions has become much harder, the only way for lenders to raise capital is to increase the interest charges on credit cards, loans, credit agreements and mortgages. This ground-shift signifies an end to the 'live now, pay later' mentality of the 1980's and 1990's. The good times really could be over - for a short time, anyway. But by readjusting their positions, the lenders may actually be doing the right thing, and not giving in to 'quick fix' solutions like rate cuts. A more pragmatic approach to the system means that credit cards still offer great deals - they're just a little more careful to avoid lending to customers that may already have problems.
Up until 2007 the previous ten years were a boom time for credit card lenders in the UK. It wasn't just the credit crunch that stopped the credit card companies in their tracks. An extremely competitive credit marketplace, coupled with a global economic slowdown, increasing international bad debts and government regulations made the credit card lenders re-evaluate their positions. Some more panic-stricken credit card companies responded by 'dumping' thousands of customers they considered not 'profitable' - namely those who paid off their credit card balance in full every month. Other lenders are reigning in their customer's spending habits by restricting credit limits and access to cash withdrawals.
The credit card industry has been hit twice. The loss of the overall market share several years before resulted in a clamour for customers, with 0% balance transfers acting as financial carrots to customers wanting to reduce their interest payments on outstanding balances. Cards are now shifting towards a policy of charging up to 3% balance transfer fees to try to pull back some of the lost profit that the 0% offers cost them. The second blow was the Office of Fair Trading's decision in 2006 to cap penalty charges to 12. Now cards are lining up for another bureaucratic blow as the Complaint's Commission takes a closer look at the personal protection insurance schemes that often accompany credit card deals.
Unemployment is the next potential credit problem as the economic downturn starts to impact on jobs over the next 12 months. If things do get worse credit card customers can expect interest rates on their cards to go up not down, as lenders try to cushion themselves against the impact bad debt exposure could have on their business. There are still plenty of good credit card deals available. But lenders are a little more careful about whom they lend to, so the best thing to do to ensure that the credit crunch doesn't scupper your chances of getting a good deal is to check your credit rating measures up before you apply.
About the Author:
Mark Wright writes regularly on the topic of the recent financial crisis, and educates readers on what to expect regarding the credit crunch. Read more about credit cards here.
posted by Debt Consolidation Loan at
2:14 AM
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