Credit card customers feel the pinch after the credit crackdown
The Bank of England may have given UK PLC an economic boost with its recent interest rate cut of 1.5%, but the credit crunch isn't just affecting big business and the banking sector. The average person in the street is feeling the squeeze too. So will the reduction of the base rate to 3% offer any short-term relief to the customers holding a total of 72 million credit cards, beleaguered by interest charges far and above the base rate?
Homeowners looked forward to the interest rate cut, knowing that lenders would trickle down the base rate cuts to mortgage payers, reducing their monthly repayments. But credit card customers have been warned from the start that the same may not apply to them. Credit card lenders tend to reduce the APR to entice new customers in, offering deals that include 0% interest for fixed terms to encourage people to take up their cards. The mere fact that the Bank of England decided to cut the base rate has had no impact on their decision to continue to charge an average of just over 17% APR on credit cards. Lenders are concerned about the possibility of exposure to bad debt, so whilst 0% deals are still available and there are plenty of incentives for new customers to be found, the criteria set by the lenders may be stricter than before.
The lenders are more aware (and increasingly concerned) by the prospect of 'bad debt' eating into their profits, as some cardholders struggle to make repayments. Profit is intrinsically tied up in the amount of interest charged, and consequently lenders are fighting hard to make sure those profits aren't squeezed further by cutting interest rates, despite Government attempts to boost the economy at ground level. This reluctance to expose their companies to a worsening position has drawn the attention of the Prime Minister and the Chancellor, prompting them to call for a "new, responsible approach" to lending. Card lenders in return have made it quite clear that they do have their customers interests at heart, and stabilising the market is their first priority, rather than making knee-jerk cuts that could cause more problems than they solve.
Store cards are some of the worst offenders, cashing in on customer loyalty and a high street that relies on continuous spending. The average credit card APR rate has risen from 16.8% in 2007 to 17.6% today, despite the interest rate almost halving from 5.75% to 3% during the same time. Store card rates have risen more sharply, up by 1% over a six-month period. The most expensive store cards now charge an average of 30%. Government officials have been angered by the reluctance shown by card lenders to reciprocate the base rate cuts, accusing the credit card companies of behaving "irresponsibly" despite the mounting pressure from the Government and the public to mirror the base rate cuts with cuts of their own APR levels. Credit card lenders, however, remain steadfast in their refusal to adjust interest charges, knowing that to do so could damage the market far more than 'instant fixes' such as rate cuts.
The fear is that credit card companies, suddenly aware of their exposure to 'bad debt', are coming down hard on debtors over relatively small sums of money owed on cards, sometimes after the cardholder has missed only a couple of monthly payments. The mounting interest charges can mean that the minimum monthly repayment barely covers the cost of administration charges and interest payments. The Citizen's Advice Bureau backs up this claim, saying that 20% of all new debt inquiries in 2007-08 related to credit card, store card and charge card debts. The Consumer Credit Counselling Service also stated that it had seen a surge in 'charging orders' by card firms, as the lenders try to minimise their debt positions.
The US has responded to the credit crisis by ensuring that interest charges to credit cards have been mirroring the base rate cut, but the UK has yet to follow suit, despite only a 2% difference in base rates between the two countries. Card lenders put the blame squarely on the Government?s shoulders, claiming that regulation such as the Office of Fair Trading?s 2006 decision to put a ?12 cap on penalty fees, as well as their own falling profits on payment protection insurance, is responsible for increasing the cost of credit. They claim that this leaves them unable to reflect changes in the base rate by cutting the APR rate on credit cards. With this in mind, reductions in credit card interest rates look unlikely any time soon. However, with a little bit of legwork and a pocket calculator, a clever consumer can still find some good credit card bargains, with some card lenders bucking the trend and continuing to offer incentives to new and existing customers.
Homeowners looked forward to the interest rate cut, knowing that lenders would trickle down the base rate cuts to mortgage payers, reducing their monthly repayments. But credit card customers have been warned from the start that the same may not apply to them. Credit card lenders tend to reduce the APR to entice new customers in, offering deals that include 0% interest for fixed terms to encourage people to take up their cards. The mere fact that the Bank of England decided to cut the base rate has had no impact on their decision to continue to charge an average of just over 17% APR on credit cards. Lenders are concerned about the possibility of exposure to bad debt, so whilst 0% deals are still available and there are plenty of incentives for new customers to be found, the criteria set by the lenders may be stricter than before.
The lenders are more aware (and increasingly concerned) by the prospect of 'bad debt' eating into their profits, as some cardholders struggle to make repayments. Profit is intrinsically tied up in the amount of interest charged, and consequently lenders are fighting hard to make sure those profits aren't squeezed further by cutting interest rates, despite Government attempts to boost the economy at ground level. This reluctance to expose their companies to a worsening position has drawn the attention of the Prime Minister and the Chancellor, prompting them to call for a "new, responsible approach" to lending. Card lenders in return have made it quite clear that they do have their customers interests at heart, and stabilising the market is their first priority, rather than making knee-jerk cuts that could cause more problems than they solve.
Store cards are some of the worst offenders, cashing in on customer loyalty and a high street that relies on continuous spending. The average credit card APR rate has risen from 16.8% in 2007 to 17.6% today, despite the interest rate almost halving from 5.75% to 3% during the same time. Store card rates have risen more sharply, up by 1% over a six-month period. The most expensive store cards now charge an average of 30%. Government officials have been angered by the reluctance shown by card lenders to reciprocate the base rate cuts, accusing the credit card companies of behaving "irresponsibly" despite the mounting pressure from the Government and the public to mirror the base rate cuts with cuts of their own APR levels. Credit card lenders, however, remain steadfast in their refusal to adjust interest charges, knowing that to do so could damage the market far more than 'instant fixes' such as rate cuts.
The fear is that credit card companies, suddenly aware of their exposure to 'bad debt', are coming down hard on debtors over relatively small sums of money owed on cards, sometimes after the cardholder has missed only a couple of monthly payments. The mounting interest charges can mean that the minimum monthly repayment barely covers the cost of administration charges and interest payments. The Citizen's Advice Bureau backs up this claim, saying that 20% of all new debt inquiries in 2007-08 related to credit card, store card and charge card debts. The Consumer Credit Counselling Service also stated that it had seen a surge in 'charging orders' by card firms, as the lenders try to minimise their debt positions.
The US has responded to the credit crisis by ensuring that interest charges to credit cards have been mirroring the base rate cut, but the UK has yet to follow suit, despite only a 2% difference in base rates between the two countries. Card lenders put the blame squarely on the Government?s shoulders, claiming that regulation such as the Office of Fair Trading?s 2006 decision to put a ?12 cap on penalty fees, as well as their own falling profits on payment protection insurance, is responsible for increasing the cost of credit. They claim that this leaves them unable to reflect changes in the base rate by cutting the APR rate on credit cards. With this in mind, reductions in credit card interest rates look unlikely any time soon. However, with a little bit of legwork and a pocket calculator, a clever consumer can still find some good credit card bargains, with some card lenders bucking the trend and continuing to offer incentives to new and existing customers.
About the Author:
Frank Armstrong specialises in financial and money related articles for websites. Get further information on low interest credit card and compare credit cards here.
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11:10 AM
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