How the slowdown is hitting the credit card market
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.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the financial institutions eyed each other suspiciously they also turned their attention to their customers, their confidence in the public's previous ability to meet repayments and pay back credit card debts evaporating. The lenders need continuous injections of cash into the system to carry on trading. The practice of banks lending to other banks has shuddered to a halt as financial institutions try to consolidate their own positions, and so that extra cash has to come from somewhere. Step forward, the great British public. The interest charges on loans, credit card debts, mortgages and credit agreements are the lifeline lenders need to continue doing business.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
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.
The economic slowdown could have yet another sting in its tail, with unemployment now under the spotlight. Higher interest rates on cards for everyone is the lender's way of buffering their position, minimising their financial exposure. It means that everyone pays the price through increased interest charges, but a more stable credit card market emerges as a result. Credit card lenders are keeping a close eye on their customers, looking for early signs of financial difficulty. They are well aware that things are tight for everyone, and by keeping a watch for customers who show signs of struggling, they can step in early and guide the customer through the financial rapids they may find themselves in. The credit crunch does mean a slowdown generally, but rather than a complete collapse of the house of cards, it's more a matter of shoring up the foundations so that the market can emerge stronger after the event.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the financial institutions eyed each other suspiciously they also turned their attention to their customers, their confidence in the public's previous ability to meet repayments and pay back credit card debts evaporating. The lenders need continuous injections of cash into the system to carry on trading. The practice of banks lending to other banks has shuddered to a halt as financial institutions try to consolidate their own positions, and so that extra cash has to come from somewhere. Step forward, the great British public. The interest charges on loans, credit card debts, mortgages and credit agreements are the lifeline lenders need to continue doing business.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
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.
The economic slowdown could have yet another sting in its tail, with unemployment now under the spotlight. Higher interest rates on cards for everyone is the lender's way of buffering their position, minimising their financial exposure. It means that everyone pays the price through increased interest charges, but a more stable credit card market emerges as a result. Credit card lenders are keeping a close eye on their customers, looking for early signs of financial difficulty. They are well aware that things are tight for everyone, and by keeping a watch for customers who show signs of struggling, they can step in early and guide the customer through the financial rapids they may find themselves in. The credit crunch does mean a slowdown generally, but rather than a complete collapse of the house of cards, it's more a matter of shoring up the foundations so that the market can emerge stronger after the event.
About the Author:
Mark Wright writes for various popular websites, and keeps a regular commentary on the recent financial crisis and credit crunch. Read more about credit cards here.
posted by Credit Counseling at
3:13 AM
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