How the slowdown is hitting the credit card market
The credit crunch is a little different to previous incarnations of economic slowdowns in that it has hit the consumer much harder and much earlier on in its development. The amount of personal borrowing against credit cards and the lenders' response to this particular crisis may have a great deal to do with that early-doors impact. A survey by the financial information analysts Moneyfacts has found that at least 10% of credit cards have raised their interest rates or fees as a direct result of the economic storm now battering 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 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.
The ten years between 1997 and 2007 were boom times for credit card lenders in the UK. The brakes weren't just put on because of the credit crunch that kicked in during 2008. An extremely competitive marketplace, the emergence of the Pacific Rim countries as manufacturing and financial superpowers, increasing international 'bad debts' and a plethora of government regulations made the credit companies re-evaluate their positions. A few companies responded with a knee-jerk reaction of 'dumping' thousands of customers that were just not profitable (those who cleared their balances every month and paid little or no interest charges). All of the credit companies tightened their criteria for lending, increasing transfer charges, restricting credit limits and access to cash withdrawals. By doing this, they're not only minimising their own exposure to bad debt, but reducing the possibility of their customers getting into trouble as well. It's a win/win move by the credit card companies, and will probably do a lot more to help stabilise the market.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many 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 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.
The ten years between 1997 and 2007 were boom times for credit card lenders in the UK. The brakes weren't just put on because of the credit crunch that kicked in during 2008. An extremely competitive marketplace, the emergence of the Pacific Rim countries as manufacturing and financial superpowers, increasing international 'bad debts' and a plethora of government regulations made the credit companies re-evaluate their positions. A few companies responded with a knee-jerk reaction of 'dumping' thousands of customers that were just not profitable (those who cleared their balances every month and paid little or no interest charges). All of the credit companies tightened their criteria for lending, increasing transfer charges, restricting credit limits and access to cash withdrawals. By doing this, they're not only minimising their own exposure to bad debt, but reducing the possibility of their customers getting into trouble as well. It's a win/win move by the credit card companies, and will probably do a lot more to help stabilise the market.
The credit card industry has suffered a double-whammy. The loss of overall market share in the late 1990's resulted in a scramble by lenders for customers, enticing in consumers with 0% balance transfer offers and cashback schemes. That has all now changed, with most cards imposing up to 3% balance transfer fees in an attempt to regain lost profits as a result of the 0% offers. The second blow was the decision in 2006 by the Office of Fair Trading to impose a 12 cap on penalty charges. Now lenders are bracing themselves for another knock-back as the Complaint's Commission takes a close look at personal protection insurance schemes imposed by lenders on many 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 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 Debt Consolidation Loan at
2:49 AM
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