Are credit cards on a collision course with interest rates?
The Bank of England's recent interest rate cut of 1.5% may have been a shot in the arm for UK PLC, but this particular credit crunch has just as much effect on the average person in the street as for big businesses and the banking sector. So will the reduction of the base rate to 3% have any major impact on the 72 million credit cards currently in circulation?
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 amongst some of the worst culprits of inflated interest charges, but a few credit cards also charge above-rate interest charges. The trick for the consumer is to hunt through the acres of information and find a deal that suits them. The average APR charge on credit cards has risen from 16.8% a year ago to the current average of 17.6% today, despite the interest rate almost halving from 5.75% to 3% over the same time period. Store card rates have risen faster, up by 1% over a six-month period, with the most expensive now charging shoppers more than 30%. This reluctance to replicate the base rate cut has angered government officials, leading them to accuse credit card companies of behaving 'irresponsibly' in the face of mounting pressure to mirror the base rate cut with reductions of their own. Despite continued calls by both the public and the Government, credit card lenders are remaining steadfast, insisting that rates on cards will not be changed. In truth, the credit card lenders are caught between a rock and a hard place. Interest payments are what keep credit card companies in business. At this time, reducing your capital would be a suicidal move by the card companies.
The credit card lenders, concerned by 'bad debt' exposure, are tightening their policies on repayments, and enforcing stricter approval guidelines for first-time card applicants. Minimum monthly repayments, as any cardholder knows, barely cover the cost of administration or interest charges. The Citizen's Advice Bureau has seen more new debt inquiries in 2007-08, with 20% of its clients expressing concerns over credit card, store card and charge card debts. The Consumer Credit Counselling Service reports a surge in 'charging orders' being enforced by lenders, potentially putting customers in even more financial difficulty as a result of missed payments. The truth is that reducing the APR on credit deals to reflect the fluctuating base rate could compound matters, forcing lenders into ever-tighter controls over lending to keep their exposure to bad debt to a minimum. That wouldn't help the consumer at all. Nor would it help to stabilise the market.
In the US, interest rates on credit cards have echoed base rate cuts, but this is unlikely to happen in the UK any time soon, despite only a 2% difference in the base rate between the two countries. Lenders point to regulations, such as the decision by the Office of Fair Trading in 2006 to cap penalty fees to 12 as responsible for their woes. They also earmark their own falling profits on payment protection insurance as a primary factor in their inability to reduce card interest rates. The card lenders are trying to maintain a critical balance at the most direct contact point that most consumers have with the financial world, and despite the nay-sayers, there are still very attractive deals to be had on credit cards, if you're prepared to do your homework.
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 amongst some of the worst culprits of inflated interest charges, but a few credit cards also charge above-rate interest charges. The trick for the consumer is to hunt through the acres of information and find a deal that suits them. The average APR charge on credit cards has risen from 16.8% a year ago to the current average of 17.6% today, despite the interest rate almost halving from 5.75% to 3% over the same time period. Store card rates have risen faster, up by 1% over a six-month period, with the most expensive now charging shoppers more than 30%. This reluctance to replicate the base rate cut has angered government officials, leading them to accuse credit card companies of behaving 'irresponsibly' in the face of mounting pressure to mirror the base rate cut with reductions of their own. Despite continued calls by both the public and the Government, credit card lenders are remaining steadfast, insisting that rates on cards will not be changed. In truth, the credit card lenders are caught between a rock and a hard place. Interest payments are what keep credit card companies in business. At this time, reducing your capital would be a suicidal move by the card companies.
The credit card lenders, concerned by 'bad debt' exposure, are tightening their policies on repayments, and enforcing stricter approval guidelines for first-time card applicants. Minimum monthly repayments, as any cardholder knows, barely cover the cost of administration or interest charges. The Citizen's Advice Bureau has seen more new debt inquiries in 2007-08, with 20% of its clients expressing concerns over credit card, store card and charge card debts. The Consumer Credit Counselling Service reports a surge in 'charging orders' being enforced by lenders, potentially putting customers in even more financial difficulty as a result of missed payments. The truth is that reducing the APR on credit deals to reflect the fluctuating base rate could compound matters, forcing lenders into ever-tighter controls over lending to keep their exposure to bad debt to a minimum. That wouldn't help the consumer at all. Nor would it help to stabilise the market.
In the US, interest rates on credit cards have echoed base rate cuts, but this is unlikely to happen in the UK any time soon, despite only a 2% difference in the base rate between the two countries. Lenders point to regulations, such as the decision by the Office of Fair Trading in 2006 to cap penalty fees to 12 as responsible for their woes. They also earmark their own falling profits on payment protection insurance as a primary factor in their inability to reduce card interest rates. The card lenders are trying to maintain a critical balance at the most direct contact point that most consumers have with the financial world, and despite the nay-sayers, there are still very attractive deals to be had on credit cards, if you're prepared to do your homework.
About the Author:
Frank Armstrong writes articles about credit and money saving for websites. Get further information on low interest credit card and compare credit cards here.
posted by Debt Consolidation Loan at
11:10 AM
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