Credit card customers feel the pinch after the credit crackdown
The recent 1.5% interest rate cut by the Bank of England may have been welcomed as a boost to the economy by UK PLC, but what about the poor, beleaguered consumer? Whilst the newspapers were filled with the good news from the City and shares perked up, the consumer was left wondering if the base rate cut would filter down to ground level and offer some relief to those paying interest on the 72 million credit cards currently in circulation.
Mortgage borrowers are eagerly awaiting news of the trickle-down effect reducing their monthly mortgage repayments. But credit card customers have been warned not to expect the same benefits, with interest rates on cards remaining unchanged. Consumers look set to continue paying an average of just over 17% APR on their cards, with no change as a result of the base rate cut due any time soon. The credit card lenders tend to only reduce interest rates to attract new customers, with 0% deals for fixed periods being the carrot of choice to draw customers in. However, in the current economic climate, lenders are reluctant to expose themselves to potential problems further down the line. An impulsive reduction of rates could actually compound the issue, destabilising an already shaky financial marketplace. Nobody wants to see another major firm go to the wall, and a sudden reduction of income as a result of APR cuts could start a chain reaction that would be difficult to bring under control. For the moment, maintaining the status quo is a more pragmatic approach.
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.
Some of the worst offenders are store cards, although the average credit card APR rate has risen to 17.6% today compared to 16.8% a year ago. Store card rates have risen sharply - up 1% in just six months - with some of the most expensive store cards now charging customers an APR of 30%. This is despite the base rate almost halving in the same time frame; from 5.75% in 2007 to 3% today. Government officials have been angered by the apparent intransigence of card lenders to reduce their rates, accusing them of behaving "irresponsibly". In return, credit card lenders remain steadfast in their more pragmatic 'wait and see' attitude, claiming sweeping reductions in the card APR rates could actually make matters worse for the financial sector as a whole, and consequently for consumers as well.
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.
Mortgage borrowers are eagerly awaiting news of the trickle-down effect reducing their monthly mortgage repayments. But credit card customers have been warned not to expect the same benefits, with interest rates on cards remaining unchanged. Consumers look set to continue paying an average of just over 17% APR on their cards, with no change as a result of the base rate cut due any time soon. The credit card lenders tend to only reduce interest rates to attract new customers, with 0% deals for fixed periods being the carrot of choice to draw customers in. However, in the current economic climate, lenders are reluctant to expose themselves to potential problems further down the line. An impulsive reduction of rates could actually compound the issue, destabilising an already shaky financial marketplace. Nobody wants to see another major firm go to the wall, and a sudden reduction of income as a result of APR cuts could start a chain reaction that would be difficult to bring under control. For the moment, maintaining the status quo is a more pragmatic approach.
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.
Some of the worst offenders are store cards, although the average credit card APR rate has risen to 17.6% today compared to 16.8% a year ago. Store card rates have risen sharply - up 1% in just six months - with some of the most expensive store cards now charging customers an APR of 30%. This is despite the base rate almost halving in the same time frame; from 5.75% in 2007 to 3% today. Government officials have been angered by the apparent intransigence of card lenders to reduce their rates, accusing them of behaving "irresponsibly". In return, credit card lenders remain steadfast in their more pragmatic 'wait and see' attitude, claiming sweeping reductions in the card APR rates could actually make matters worse for the financial sector as a whole, and consequently for consumers as well.
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 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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