Free credit cards could be scrapped

9 November 2009

Paying an annual fee for a credit card could become the norm, as bad debts, regulation and funding constraints put unsustainable pressure on lenders, a new report has warned.

The amount of money spent on credit cards has fallen by 3% since the onset of the recession, despite the fact that household borrowing on mortgages and secured loans has remained broadly constant.

Meanwhile, the number of people not paying their credit card debts accounted for 5.8% of all outstanding balances at the end of 2008, and could increase to reach 9% by the end of 2010, according to the PricewaterhouseCoopers’ report. It estimates that only 32% of people are able to make repayments on all their outstanding credit, down from 56% last year.

It believes this rise in ‘bad debt’, alongside funding constraints, is putting considerable pressure on lenders and could eventually lead to the death of credit cards as a free borrowing tool.

Egg recently became the first provider to launch a pay-for-cashback credit card. The Egg MasterCard costs £12 a year and in return customers receive 1% cashback on all purchases made at MasterCard outlets, up to £200 a year.

“Over the last 12 months there has been a cooling passion for plastic – credit card borrowing has fallen by 3% to £64 billion and the number of cards in circulation has fallen by 8%,” says Richard Thompson, a partner at PricwaterhouseCoopers.

“Large-scale change within the sector over the next few years is inevitable. We’re likely to see credit cards being reinvented as payment rather than borrowing tools.”

In the meantime, interest rates are expected to rise sharply and more credit card providers could introduce annual fees.


Borrowers who have a poor history of borrowing will be expected to pay even more for standard credit cards, while customers at the other end of the scale will have to pay for premium benefits.

Thompson adds: “Lenders will focus on those customer segments that are the most profitable, rather than those that are in the most need of credit. Some consumers will therefore be forced towards the less mainstream corners of the industry in search of credit, a trend that may not be in their interest.”

“We expect there to be an increasing number of transactions in debt portfolios as lenders make these operational decisions about whether they want exposures to particular segments of the population or geographies.”

A government crackdown on credit card practices is also putting pressure on margins. New rules recently introduced make it harder for providers to increase the interest rates, and in June 2010, when the Consumer Credit Directive is introduced, providers will have to provide more information to customers.
Equally, lenders used to make considerable profit from selling payment protection insurance (PPI) alongside credit cards, as well as other loans. New rules restricting the sale of PPI means many are having to recoup their losses elsewhere – namely, by increasing interest rates and charges.

The PricewaterhouseCoopers’ report states: “New sources of revenue will be required to improve the profitability of retailer credit programmes and the pressure on store cards to introduce new fees will be particularly acute.”

Average credit card interest rates, know as APRs, have already shot up; in January, the average APR was 17.06% but this has now risen to 18.22%, according to moneysupermarket,com. 

Peter Harrison, credit card expert at the comparison website, agrees that annual fees could be the next step.

However, he argues this doesn't have to be a bad thing: "The increase in bad debt may see the introduction of annual fees that could bring about greater trust in this form of borrowing and ensure credit card customers are treated fairly, as long as it is clear and upfront and other ‘hidden' charges are abolished as a result."

Harrison adds: "Consumers should be aware that credit cards are likely to be more difficult to come by next year, so it is likely that borrowers will have to turn to their current account provider to obtain a suitable deal."

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