Credit card customers feel the pinch after the credit crackdown
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?
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
The lenders are concerned at exposing themselves to more 'bad debt', as cardholders struggle to meet repayments in the worsening economic climate. As a result, the card companies are not passing on the rate cut to their customers, despite Government attempts to boost the economy at ground level through fiscal policies that often seem to be knee-jerk reactions to the latest headlines. As a result, the credit card market looks set to be the next target of Gordon Brown and his Chancellor, as the Government calls for a ?new, responsible approach? to lending.
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 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.
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.
While mortgage borrowers will have to wait and see if the trickle-down effect reduces the cost of their mortgage repayments, credit card customers have been warned not to expect repayments to fall. Consumers look set to continue to pay an average of 17% APR on credit cards, and that percentage is unlikely to change as a result of the rate cut. The common opinion is that rates are only cut to attract customers, and in the current economic climate, lenders are reluctant to encourage even more credit into the system. Even though the lenders would like to pass on these savings to their customers, in the current economic climate those savings may have to wait a while until the market is more stable.
The lenders are concerned at exposing themselves to more 'bad debt', as cardholders struggle to meet repayments in the worsening economic climate. As a result, the card companies are not passing on the rate cut to their customers, despite Government attempts to boost the economy at ground level through fiscal policies that often seem to be knee-jerk reactions to the latest headlines. As a result, the credit card market looks set to be the next target of Gordon Brown and his Chancellor, as the Government calls for a ?new, responsible approach? to lending.
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 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.
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 apr credit cards and compare credit cards here.
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11:34 AM
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