Are credit card companies taking advantage of the credit crunch?
It’s been hard to miss the impact of the credit crunch on mortgage borrowing – rates have risen, criteria has got tougher and some banks have suspended lending altogether. But the impact on other borrowing – like credit cards – is not so obvious.
The credit crunch and fears of a recession do seem to have reduced the number of people spending on plastic slightly – 60% of purchases were made with cash last year up from 54% in 2006, according to the British Retail Consortium. And this trend is likely to continue, given that the Bank of England’s recent Credit Conditions survey revealed many banks plan to reduce the amount of unsecured credit they lend over the next three months.
Many borrowers are already feeling the effects of credit card companies tightening their belts. Research from MoneyExpert reveals that credit card applications from more than 3.2 million people were turned down in the past six months - equal to 18,000 applications a day.
Sean Gardner, of MoneyExpert, says bad credit histories are the main reason people are now being denied credit: "For years borrowers have had the upper hand in the credit card game but the rules have now changed. People with debts who thought they could keep shuffling their cards to stay ahead are now running into trouble.”
Even people with pre-existing cards are noticing a change of attitude among providers – Egg, for example, has shed 161,000 customers that it claims present a higher degree of risk.
It may be harder to get a credit card if your borrowing history is shady, but the good news is that since the credit crunch hit the UK last summer interest rates on cards have remained pretty static. There may not be so many deals around but rates have not been gone sky-high in the same way that mortgage costs have.
But that’s not to say that credit card companies haven’t been trying to offset the losses inflicted by the credit crunch.
By introducing small changes here and there the credit card providers are snatching back some of the margins lost as a result of the credit crunch. For example, earlier in April, Citibank – the parent of Egg – increased the minimum interest charge on its credit card from 50p to £1. This means that customers who pay off their balance but leave an outstanding amount as little 1p will see this topped up to £1.
But that is far from being the only sneaky tactic credit card providers are employing to make borrowing on credit more expensive.
Michelle Slade, an analyst at Moneyfacts, says some providers are using every opportunity they can to get more money from their customers. For example, some now charge if customers request duplicate statements or need to change the address where their statements are sent.
Elsewhere, balance transfer fees have increased, the cost of using a card to withdraw cash is creeping upwards, and the consequence of missing just one payment could be your provider scrapping your 0% purchase period.
The credit crunch is not the only factor behind these trends – the Office of Fair Trading’s directive two years ago for default charges to be capped at £12 is also a significant driving force, according to Moneyfacts.
Slade says rates have increased by about 1.5% since April 2006. In addition, penalties other than default charges have increased.
For example, in the last two years the average charge for cash advances have increased by 2% (minimum £2) to 3% (minimum £3).
With credit card companies tightening up, only people with the cleanest slates can expect to get the best deals. While there may seem no harm in trying, in reality if you are turned down for credit you could end up with a black mark on your credit report – which could impact on your ability to borrow in the future.
It's certainly tougher to get a credit card in these uncertain times, and even harder to keep one without being stung by new charges and penalities. The answer is to not only shop around for a great deal but also to look closely at all the catches to make sure you don't end up being penalised.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.