Are credit cards on a collision course with interest rates?
The Bank of England may have given UK PLC an economic boost with its recent interest rate cut of 1.5%, but the credit crunch isn't just affecting big business and the banking sector. The average person in the street is feeling the squeeze too. So will the reduction of the base rate to 3% offer any short-term relief to the customers holding a total of 72 million credit cards, beleaguered by interest charges far and above the base rate?
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 more aware (and increasingly concerned) by the prospect of 'bad debt' eating into their profits, as some cardholders struggle to make repayments. Profit is intrinsically tied up in the amount of interest charged, and consequently lenders are fighting hard to make sure those profits aren't squeezed further by cutting interest rates, despite Government attempts to boost the economy at ground level. This reluctance to expose their companies to a worsening position has drawn the attention of the Prime Minister and the Chancellor, prompting them to call for a "new, responsible approach" to lending. Card lenders in return have made it quite clear that they do have their customers interests at heart, and stabilising the market is their first priority, rather than making knee-jerk cuts that could cause more problems than they solve.
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.
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 more aware (and increasingly concerned) by the prospect of 'bad debt' eating into their profits, as some cardholders struggle to make repayments. Profit is intrinsically tied up in the amount of interest charged, and consequently lenders are fighting hard to make sure those profits aren't squeezed further by cutting interest rates, despite Government attempts to boost the economy at ground level. This reluctance to expose their companies to a worsening position has drawn the attention of the Prime Minister and the Chancellor, prompting them to call for a "new, responsible approach" to lending. Card lenders in return have made it quite clear that they do have their customers interests at heart, and stabilising the market is their first priority, rather than making knee-jerk cuts that could cause more problems than they solve.
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 interest credit card and compare credit cards here.
posted by Credit Counseling at
11:04 AM
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