Is the crunch putting the brakes on credit cards?
The current credit quagmire is a different animal to previous slowdowns, economic downturns or financial crises. Firstly it has a catchy, media-friendly name ('Credit Crunch'). Secondly and most importantly it's hit consumers harder and much earlier than previous 'economic readjustments'. The catchy title isn't to be underestimated - the media's love of the term has raised awareness amongst the general public that there is a major problem with the financial system. It's also brought home the fact that much of what is happening now is a direct consequence of the 10 years of good times had by all in the credit bonanza of the late 1990's and early 2000's. A survey by financial information analysts Moneyfacts has found that at least 10% of credit cards have raised their interest rates as a direct response to the current crisis.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the financial institutions lost faith with each other, they tightened up on lending criteria across the board. This was primarily to stabilise an already shaky marketplace and stop everyone running the risk of 'bad debt', both lenders and borrowers alike. The lenders need money to continue trading and as borrowing from other banks and financial institutions has practically stopped, the only way for them to get the money they need to continue in business is to increase interest charges on credit agreements, loans, credit cards and mortgages. This signifies an end to the 'live now, pay later' lifestyle that the First World industrial countries have enjoyed for so many years.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
The credit card industry has been hit twice. The loss of the overall market share several years before resulted in a clamour for customers, with 0% balance transfers acting as financial carrots to customers wanting to reduce their interest payments on outstanding balances. Cards are now shifting towards a policy of charging up to 3% balance transfer fees to try to pull back some of the lost profit that the 0% offers cost them. The second blow was the Office of Fair Trading's decision in 2006 to cap penalty charges to 12. Now cards are lining up for another bureaucratic blow as the Complaint's Commission takes a closer look at the personal protection insurance schemes that often accompany credit card deals.
Unemployment is the next potential credit problem as the economic downturn starts to impact on jobs over the next 12 months. If things do get worse credit card customers can expect interest rates on their cards to go up not down, as lenders try to cushion themselves against the impact bad debt exposure could have on their business. There are still plenty of good credit card deals available. But lenders are a little more careful about whom they lend to, so the best thing to do to ensure that the credit crunch doesn't scupper your chances of getting a good deal is to check your credit rating measures up before you apply.
A knock-on effect of the credit crunch has been the average interest rate on credit cards rising from 16.8% to 17.2% since the start of August 2008. This trend upwards is in direct opposition to the Bank of England's policy of cutting base interest rates to stave off the chances of runaway inflation. The credit crunch is biting, and biting hard. As banks and lenders realise that the money pot in the City is nearly empty, they know that this time consumers are feeling the squeeze as well. In the lenders' eyes that means a greater risk of customers defaulting on payments, so the interest rate rise on credit cards is seen as a financial cushion against defaults and bad debt. The lenders are shoring up their financial positions and doing their utmost to reduce their exposure to bad debt.
As the financial institutions lost faith with each other, they tightened up on lending criteria across the board. This was primarily to stabilise an already shaky marketplace and stop everyone running the risk of 'bad debt', both lenders and borrowers alike. The lenders need money to continue trading and as borrowing from other banks and financial institutions has practically stopped, the only way for them to get the money they need to continue in business is to increase interest charges on credit agreements, loans, credit cards and mortgages. This signifies an end to the 'live now, pay later' lifestyle that the First World industrial countries have enjoyed for so many years.
From 1997 until 2007, the lenders were having a boom time in the UK. But the credit crunch wasn't the only thing that seemed to stop the good times in their tracks. An increasingly competitive marketplace, the emergence of economic superpowers like China and India, increasing bad debts and government legislation all contributed to the lenders reassessing their financial positions. Some companies responded by 'dumping' thousands of customers who were seen as non-profit clients - the people who paid off their balance in full each month and incurred minimal interest charges. All lenders have tightened up their criteria for lending, including restricting credit limits, imposing higher fees on balance transfers and limiting access to cash withdrawals. Although this may seem like a further indication that things are getting worse, it could actually be the right move - stabilising the credit market and reducing the possibility of credit card customers borrowing more than they can afford to pay back. The credit card lenders may actually lead the way in market recovery by this simple readjustment of open lending policy.
The credit card industry has been hit twice. The loss of the overall market share several years before resulted in a clamour for customers, with 0% balance transfers acting as financial carrots to customers wanting to reduce their interest payments on outstanding balances. Cards are now shifting towards a policy of charging up to 3% balance transfer fees to try to pull back some of the lost profit that the 0% offers cost them. The second blow was the Office of Fair Trading's decision in 2006 to cap penalty charges to 12. Now cards are lining up for another bureaucratic blow as the Complaint's Commission takes a closer look at the personal protection insurance schemes that often accompany credit card deals.
Unemployment is the next potential credit problem as the economic downturn starts to impact on jobs over the next 12 months. If things do get worse credit card customers can expect interest rates on their cards to go up not down, as lenders try to cushion themselves against the impact bad debt exposure could have on their business. There are still plenty of good credit card deals available. But lenders are a little more careful about whom they lend to, so the best thing to do to ensure that the credit crunch doesn't scupper your chances of getting a good deal is to check your credit rating measures up before you apply.
About the Author:
Mark Wright writes for various popular websites, and keeps a regular commentary on the recent financial crisis and credit crunch. Read more about credit cards here.
posted by Credit Counseling at
2:36 AM
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